What tax implication does the death benefit from a life insurance policy have for the beneficiary?

The death benefit received by a beneficiary from a life insurance policy is generally received income tax-free. This means that when a policyholder passes away, the payout made to the beneficiary is not considered taxable income under federal tax law. Therefore, the beneficiary is free to use the funds without incurring any income tax liability on the amount received.

This tax treatment applies regardless of the size of the death benefit and is designed to provide financial support to beneficiaries without the burden of taxation on the proceeds. It is an important feature of life insurance policies, making them a preferred choice for individuals looking to provide financial protection for their loved ones in the event of their death.

However, while the death benefit is typically income tax-free, there are other tax implications to consider, such as estate tax. In certain situations, the value of the life insurance policy may be included in the deceased's estate, which could be subject to estate taxes depending on the total value of the estate and applicable exemptions. Thus, while the correct answer highlights the key tax-free nature of the death benefit, it’s also essential to understand the broader context of estate planning and how life insurance fits into it.