Final answer:
When the death proceeds of a policy are paid out under the interest-only option, the beneficiary receives only the interest earned on the death benefit, which is typically considered taxable income.
Step-by-step explanation:
When the death proceeds of a policy are paid out under the interest-only option, there are potential tax implications to consider.
Under this option, the beneficiary receives only the interest earned on the death benefit, while the remaining principal amount is retained by the insurance company.
From a tax perspective, the interest received by the beneficiary is typically considered taxable income. The specific tax treatment may vary depending on the jurisdiction and the individual's tax situation, so it is important to consult with a tax professional for accurate advice.