Which of the following death benefits is income tax-free for the beneficiary?

The correct answer identifies a key characteristic of life insurance policies when it comes to tax implications for beneficiaries. When a life insurance policy is in force and the insured individual passes away, the death benefit paid out to the beneficiaries is generally considered income tax-free. This means that beneficiaries receive the full amount of the death benefit without having to pay any federal income tax on it.

This tax advantage is one of the primary reasons people often include life insurance as part of their financial planning, especially for income replacement or estate planning purposes. It provides peace of mind that loved ones will receive financial support without the burden of taxation on the benefit received.

In contrast, annuities may have different tax treatments based on various factors such as the phase of the annuity (accumulation or distribution) and whether it has been utilized for retirement income planning. When an annuity's annuitant dies during the accumulation phase, the beneficiary may receive the accumulated value but could face tax implications. Similarly, if the annuitant dies during the distribution phase, remaining payouts may be subject to taxes. If the annuitant was using the annuity for retirement planning, the tax treatment can vary further depending on prior withdrawals and the structure of the annuity itself.

Overall, the