When a life insurance death benefit is paid to a named beneficiary, which portion of the payment might be subject to income tax for that beneficiary?

Question: When a life insurance death benefit is paid to a named beneficiary, which portion of the payment might be subject to income tax for that beneficiary?

Answer options:

• The entire face amount of the life insurance policy.
• The portion of the death benefit that represents the policy's cash value. ✅ The interest earned on the death benefit from the date of death to the date of payment.
• The premiums that were paid into the policy over its lifetime.

Correct answer: The interest earned on the death benefit from the date of death to the date of payment.

Explanation: While death benefits are generally tax-free, interest earned on the death benefit from the date of death until the claim is paid is considered taxable income to the beneficiary.