Texas General Lines — Life, Accident, Health and HMOGeneral InsuranceHard
A life insurance policyowner dies, and the beneficiary receives the death benefit. The policy had a cash value of $50,000, and the death benefit paid was $200,000. For federal income tax purposes, how much of the death benefit received by the beneficiary is generally taxable?
- A$200,000
- B$0
- C$150,000
- D$50,000
Show answer & explanationAnswer & explanation
Correct answer: B. $0
Under federal income tax law, the death benefit proceeds of a life insurance policy are generally received by the beneficiary income tax-free. The cash value amount and the face amount are irrelevant to the income tax status of the death benefit itself, which is typically not considered taxable income to the beneficiary.
Why the other options are wrong
- A. The entire death benefit is typically not subject to income tax for the beneficiary.
- C. This implies a partial tax, which is generally incorrect for death benefits.
- D. The cash value is irrelevant to the income tax treatment of the death benefit.
Taxation of Life Insurance Death Benefits
Life insurance death benefit proceeds received by a beneficiary are generally exempt from federal income tax.
- Beneficiary receives income tax-free.
- Exception: transfer for value rule.
- Estate tax may apply if policy included in insured's estate.
Memory trick: Death Benefit: Tax-Free, you see!