How is the taxable portion of a life insurance death benefit determined?

The taxable portion of a life insurance death benefit is typically determined by whether the benefit exceeds the total amount of premiums paid into the policy. In most cases, the death benefit received by the beneficiary is not taxable and is received free of income tax. However, if the policy has accumulated certain earnings or if it is paid out as part of a settlement option that includes interest, the portion exceeding the total premiums paid may be taxable as income.

This means that if the total payout equals or is less than the premiums the insured paid, the beneficiary would not have to pay taxes on the amount received. On the other hand, if the death benefit exceeds the total premiums, the excess portion could be subject to taxes.

The other choices do not accurately represent the general tax treatment of life insurance death benefits. While some might suggest that all benefits are taxable or only a specific portion is taxable, they fail to account for the standard tax exemption applied to most life insurance payouts.