Is the death benefit of a life insurance policy taxed to the beneficiary if it's received as a lump sum?

The death benefit of a life insurance policy is generally received tax-free by the beneficiary when it is paid out in a lump sum. This means that the full amount of the benefit goes directly to the beneficiary without any deductions for federal income taxes.

This tax-free status is one of the significant advantages of life insurance; it provides financial support to the beneficiaries during a challenging time without the burden of taxation. The IRS recognizes that these death benefits are meant to assist with grief, expenses, and future planning, reinforcing the notion that the financial assistance provided should remain intact for the beneficiary's needs.

While other situations can involve taxation, such as if the death benefit is paid out in installments or if the policy had a cash value that was surrendered before the insured's death, the straightforward lump-sum payment at the time of the insured's death is exempt from taxation, making this answer the correct choice.