Which of the following statements is (are)true regarding taxation of life insurance?
I.Life insurance proceeds paid in a lump-sum to a designated beneficiary are received free of federal income taxes.
II.The policyowner must pay taxes annually on the amount by which the cash value of his or her life insurance policy has increased.

Question

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Statement I is true. Life insurance proceeds paid in a lump-sum to a designated beneficiary are received free of federal income taxes.

Statement II is false. The policyowner is not required to pay taxes annually on the amount by which the cash value of his or her life insurance policy has increased. However, if the policyowner surrenders the policy for cash or sells it for more than the policy's cash value, they may have to pay taxes on any gains made.

Which of the Following Statements Is (Are)true Regarding Taxation of Life