Final answer:
Life insurance proceeds are income taxable in most circumstances, except for specific exceptions. Exceptions include receiving proceeds for medical expenses, car damage, or dwelling damage or burglary. Otherwise, life insurance proceeds received due to the policyholder's death are generally subject to income tax.
Step-by-step explanation:
Unless an exception applies, life insurance proceeds are income taxable when received as a result of the policyholder's death. This means that if a person receives a payout from a life insurance policy upon the death of the policyholder, that payout is subject to income tax unless an exception applies. However, it's important to note that life insurance proceeds are generally not taxable when received as a result of medical expenses, car damage, or dwelling damage or burglary.