Beneficiaries✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
Under IRC Section 101(a), a life insurance death benefit paid to a named beneficiary in a lump sum is generally:
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
IRC Section 101(a) provides that amounts received under a life insurance contract by reason of the insured's death are generally excluded from the beneficiary's gross income. This means the death benefit is income-tax-free when paid as a lump sum. The exclusion is a cornerstone of life insurance tax planning and is a federal rule that applies in every state. Note that the exclusion applies to income tax; estate tax is a separate matter and may apply if the insured retained incidents of ownership and the policy value exceeds exemption thresholds.
Why the other options are wrong
- B) Life insurance death proceeds are not treated as ordinary income. IRC Section 101(a) excludes them from gross income, which is what makes life insurance an attractive wealth transfer vehicle.
- C) Death proceeds are not capital gains. The capital gains concept applies to appreciation in assets sold at a profit, not to insurance payments triggered by death, and the exclusion here is statutory rather than a gain calculation.
- D) The exclusion is a federal rule found in the Internal Revenue Code and applies to all taxpayers in every state. State income tax treatment does not change the federal exclusion.
Memory hook
Life death benefit = income-tax-free by federal statute. Uncle Sam sits out of this payout.