Chartered Life Underwriter Practice Exam 2025 - Free CLU Practice Questions and Study Guide

Life insurance death benefits are typically considered tax-free for the beneficiaries. This means that when the insurer pays out the benefit upon the death of the policyholder, the full amount received by the beneficiaries is not subject to income tax. This fundamental principle serves as a crucial advantage of life insurance, as it provides financial support to the dependents or beneficiaries without the burden of tax consequence.

In situations where the death benefit is received as a lump sum, the beneficiary does not have to report this income on their tax return. This treatment aligns with the policy's intended purpose: to provide financial protection and ensure the well-being of surviving family members after the loss of the insured.

The tax-free status of death benefits is an essential aspect of life insurance that underscores its role in estate planning and financial security for families. It contrasts sharply with other financial products or investment returns, which may incur taxation based on different rules and rates.