Question

Which of the following statements is CORRECT regarding the tax treatment of a lump-sum payment paid to a life insurance policy's primary beneficiary?

A. The proceeds which exceed the amount paid in premiums are taxable.
B. All proceeds are taxable only if the beneficiary's tax bracket has changed the payout
C. All proceeds are taxable income tax free in the year they are received
D. All proceeds are income tax free in the year they are received

Answer 1

Lump-sum payments from a life insurance policy to a primary beneficiary are generally received income tax free.

Step-by-step explanation:

The correct statement regarding the tax treatment of a lump-sum payment paid to a life insurance policy's primary beneficiary is D. All proceeds are income tax free in the year they are received. Generally, the death benefit of a life insurance policy is paid out to beneficiaries tax-free. Instead of being taxed on the amount they receive from the policy, beneficiaries usually receive the full death benefit without having to pay income tax on it.