A beneficiary has just received a claim payment for a life insurance policy. Which of the following is TRUE regarding the federal income tax liability owed?

When a beneficiary receives a claim payment from a life insurance policy, the proceeds are generally not subject to federal income tax. This tax-exempt status applies to the death benefits paid to the beneficiaries, as the Internal Revenue Service (IRS) recognizes that these funds are intended to provide financial support rather than serve as income.

The only instance in which taxation may occur is if the insurance policy has been sold or transferred to another party. In such cases, any appreciation in value could be taxed, specifically the interest earned if the payout is not received in a lump sum but through an installment method. However, the principal amount received as a death benefit remains tax-free for the beneficiaries.

Understanding this tax treatment is crucial for beneficiaries, as it ensures that they receive the intended financial relief without the burden of additional taxes on the life insurance proceeds. Thus, the correct assertion is that no federal income tax is owed on life insurance proceeds.