What is the federal income tax liability of a death benefit paid from a health insurance policy to a named beneficiary?

• A. Benefits are not taxable
• B. Fully taxable
• C. Taxable to extent of premiums paid
• D. Taxable if paid as lump sum

Answer: (A)

Death benefits paid to a named beneficiary from a health insurance policy are generally not taxable. Under the federal tax rules for life insurance, the proceeds you receive as a death benefit are excluded from gross income, so the beneficiary typically owes no federal income tax on the amount itself, whether it’s paid in a lump sum or over time. The premiums paid don’t change this treatment. The only portion that could be taxable is any interest that accrues on the proceeds if the insurer holds them for a time before payment.