Which statement about death benefits tax treatment is accurate?

• A. Not taxable
• B. Taxable as ordinary income
• C. Taxable as capital gains
• D. Generally tax-free, with exceptions for interest or certain distributions

Answer: (D)

Death benefits are generally received by the beneficiary without federal income tax. The death benefit itself is excluded from gross income under IRS rules, so the lump-sum amount typically isn’t taxed. The key reversal comes with timing: if the insurer delays payment and the funds earn interest, that interest portion is taxable as ordinary income to the beneficiary. Additional tax concerns can arise in special situations (such as transferring the policy for value or certain estate-tax considerations), but the standard rule remains: death benefits are generally tax-free, with exceptions for interest on delayed payments or specific distributions. This is why the correct statement reflects “generally tax-free, with exceptions for interest or certain distributions.”