Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

Which type of death benefits are generally received tax-free?

1. Life insurance death benefits

2. Pension death benefits

3. Annuity death benefits

4. Retirement account death benefits

The correct answer is: Life insurance death benefits

Life insurance death benefits are generally received tax-free by the beneficiaries. This tax advantage arises from the Internal Revenue Code, which specifies that amounts received by beneficiaries as a result of the death of the insured are typically excluded from the recipient's gross income. This means that the full face amount of the policy can be received without any tax deductions, enhancing the financial security provided to loved ones. In contrast, other types of death benefits may not carry the same tax-exempt status. For instance, pension death benefits can be subject to income tax to the beneficiary depending on how the benefit is structured. Annuity death benefits may also have tax implications, particularly if the annuity was funded with pre-tax dollars. Similarly, retirement account death benefits, such as those from IRAs or 401(k) plans, are generally taxed as ordinary income to the beneficiary. Thus, the tax-free status of life insurance death benefits makes them a crucial financial tool for estate planning and providing for heirs.