Primerica Life Producer Practice Test

Are death benefits payable to a beneficiary under a life insurance policy subject to income taxation by the Federal Government?

1. Yes, they are subject to taxation

2. No, they are generally not subject to taxation

3. Only if the estate exceeds a certain value

4. Only if it was a term life policy

The correct answer is: No, they are generally not subject to taxation

Death benefits paid to a beneficiary under a life insurance policy are generally not subject to income taxation by the Federal Government. This tax treatment applies because life insurance proceeds are usually exempt from federal income tax when paid out as a lump sum to beneficiaries upon the death of the insured. The primary reason for this tax exemption is to support the financial security of the beneficiaries, allowing them to receive full benefit from the policy and use the funds as intended without the burden of taxation. However, it is important to note that while the death benefit itself is not taxed, there could be exceptions, such as if the policyholder has borrowed against the policy or if the proceeds are paid out in installments where interest is earned. Additionally, if the estate of the deceased exceeds a certain value, it may be subject to estate taxes, but this is separate from the income tax on the death benefit itself. This understanding aligns with the regulations set forth by the Internal Revenue Service (IRS) regarding life insurance policies and their benefits to beneficiaries.