Which of the following statements is true about death benefits paid under a life insurance policy?

Death benefits paid under a life insurance policy are generally free of federal income tax. This means that beneficiaries typically receive the full amount of the death benefit without having to pay federal income taxes on it. This tax-free treatment is one of the significant advantages of life insurance policies, as it provides financial protection to the beneficiaries at a time when they may need it most.

The rationale behind this tax exemption is that life insurance benefits are intended to provide financial support and security to families following the death of the policyholder. As a result, the federal government does not impose taxes on these benefits, allowing the intended recipients to receive the full amount without deductions.

Additionally, the tax-free status also applies regardless of how long the policy was held or the cash value accumulation, as long as the policy is kept in force and the death benefit is paid out to the designated beneficiaries. Understanding this fundamental aspect is crucial for individuals considering life insurance as a financial planning tool or for those advising clients on life insurance options.