Death benefits paid from a health insurance policy to a named beneficiary are generally:

• A. Taxable in full
• B. Not taxable
• C. Taxable to extent of the premiums paid
• D. Taxable if included with other income

Answer: (B)

Death benefits from a life insurance policy paid to a named beneficiary are generally not taxable. This payout is treated as a tax-free transfer of wealth to the beneficiary, since the policy is funded with after-tax dollars and the benefit itself is not considered income. The one exception is if interest accrues on the death benefit after the insured’s death, in which case that interest would be taxable as interest income.