In what circumstance is a death benefit from a life insurance policy taxable?

A death benefit from a life insurance policy is generally not subject to income tax when it is received by a beneficiary. However, if the total amount of the benefits received exceeds the total premiums that were paid into the policy, the excess may be considered taxable income.

This situation arises in cases where the policyholder cashes in the policy or when the death benefits are part of a larger financial strategy that results in gains beyond the policy contributions. For instance, if an individual paid $50,000 in premiums over the life of the policy, and upon death, the beneficiary receives $70,000, the $20,000 difference—the gain—may be taxable.

While there may be scenarios related to estate taxes or specific planning strategies that could create tax implications, the straightforward taxation of life insurance death benefits hinges on the relationship between total benefits received and total premiums paid. Thus, it is important to understand that the gain over premiums paid is where tax obligations may arise, reinforcing the correctness of the selected answer.