What are the tax implications of life insurance death benefits?

The correct choice highlights that life insurance death benefits are typically not subject to federal income tax for beneficiaries. This means that when a policyholder dies and the beneficiaries receive the death benefit payout, they generally do not have to include that money as taxable income on their federal tax returns. This tax treatment is a significant advantage of life insurance, making it a popular option for individuals seeking to provide financial security for their loved ones after their passing.

In most cases, the death benefits received by beneficiaries are paid out in a lump sum and are considered to be a non-taxable receipt. This rule applies regardless of the relationship between the policyholder and the beneficiary, ensuring financial support without the immediate burden of tax implications.

Understanding this tax advantage is essential for both producers and policyholders, informing decisions about estate planning and the financial benefits of life insurance.