What is the tax implication for beneficiaries of a life insurance policy upon the death of the insured?

The correct response is that death benefits from a life insurance policy are generally received by beneficiaries without any income tax liability. This means that the beneficiaries do not have to pay taxes on the benefits they receive when the insured passes away. This tax-free status is one of the significant advantages of life insurance; it allows the beneficiaries to receive the full amount intended for them without any deductions for taxes.

However, there are situations in which the death benefit could be included in the gross estate of the deceased, potentially subjecting it to estate tax if the estate exceeds certain thresholds. Nonetheless, this does not change the tax treatment of the benefit itself, which remains tax-free to the beneficiary.

It's important to recognize that while beneficiaries enjoy the immediate benefits tax-free, if the policyholder had certain conditions or if the estate is substantial, there might be other tax implications concerning the overall estate, but this is distinct from how the death benefit is treated when it is paid out.