How are death benefits from a life insurance policy, in which the decedent held incidents of ownership, regarded for tax purposes?

How are death benefits from a life insurance policy, in which the decedent held incidents of ownership, regarded for tax purposes?

• A. Not subject to federal estate tax.
• B. Not subject to either the federal income or estate tax.
• C. Subject to both federal income and estate tax.
• D. Not subject to federal income tax.

Answer: (D)

Understanding how life insurance death benefits are taxed. Death benefits from a life insurance policy are generally not subject to federal income tax for the beneficiary. Even if the decedent held incidents of ownership, that ownership status affects whether the proceeds may be included in the decedent’s estate for federal estate tax, but it does not make the proceeds taxable as income to the beneficiary. So the statement that these benefits are not subject to federal income tax is correct, which is why this option is the best choice.

Understanding how life insurance death benefits are taxed.

Death benefits from a life insurance policy are generally not subject to federal income tax for the beneficiary. Even if the decedent held incidents of ownership, that ownership status affects whether the proceeds may be included in the decedent’s estate for federal estate tax, but it does not make the proceeds taxable as income to the beneficiary. So the statement that these benefits are not subject to federal income tax is correct, which is why this option is the best choice.