Which statement is true regarding the death benefit of a life insurance policy?

The death benefit of a life insurance policy is generally considered tax-free to the beneficiaries. When the insured person passes away, the lump sum payment made to the beneficiaries is typically not subject to federal income tax. This tax-free treatment is a fundamental advantage of life insurance, allowing the beneficiaries to receive the full amount of the death benefit without worrying about tax implications.

In most cases, beneficiaries can use these funds freely, whether it's to cover funeral expenses, pay off debts, or provide ongoing financial support. The tax-free nature of the death benefit is an important aspect that encourages individuals to consider life insurance as part of their financial planning.

Though there are certain scenarios where tax implications can arise, such as if the policyholder's estate exceeds the estate tax exemption limits, the general rule remains that life insurance death benefits are not subject to income tax for the beneficiaries, solidifying the reasoning for the chosen answer.