What is the federal income tax liability on death benefits paid from a health insurance policy to a beneficiary?

The correct answer is that benefits are not taxable. In general, death benefits paid from a health insurance policy to a beneficiary are not subject to federal income tax. This is an important concept as it allows beneficiaries to receive the full amount of the death benefit without the reduction of taxes, providing financial relief during a difficult time.

The tax treatment of these benefits is stipulated under federal tax laws, specifically under the Internal Revenue Code, which ensures that proceeds from life insurance and health insurance policies paid upon the death of the insured are exempt from income taxation. This feature can significantly aid the surviving beneficiaries, allowing them to use the funds as intended without concern for tax liabilities that might otherwise diminish the benefits received.

Understanding this concept is critical for individuals engaging in estate planning and for beneficiaries who may be uncertain about how they will be taxed on such benefits.