Question

A life insurance company just paid a $100,000 death benefit to a beneficiary. When the insured died, the cash value was $15,000 and the total premiums-paid equaled $10,000. How much of the proceeds will be added to the beneficiary's gross income for federal income tax purposes?

a. nothing
b. $5,000
c. $100,000
d. $105,000

Answer 1

Life insurance death benefits are generally not subject to federal income tax, so the beneficiary will not have to add any portion of the $100,000 death benefit to their gross income for tax purposes.

Step-by-step explanation:

The amount of life insurance proceeds that will be added to the beneficiary's gross income for federal income tax purposes is nothing. Generally, life insurance death benefits paid to beneficiaries are not subject to federal income tax. In this scenario, the insured had a cash value of $15,000 and had paid a total of $10,000 in premiums. Since the death benefit is $100,000, which is paid out due to the death of the insured, the full amount is considered a death benefit and is not taxable income to the beneficiary. Therefore, the correct answer is a. nothing.