Tax TreatmentQuestion 709 of 716
When death proceeds are left with the insurer and paid to the beneficiary in installments, the portion that is taxable is the:
a.The entire installment, principal and interest
b.Neither the principal nor the credited interest
c.Only the return of the principal death benefit
d.Interest earned on the retained proceeds
Explanation
The death benefit principal remains income-tax-free, but any interest the insurer credits on proceeds it holds under a settlement option is taxable. Only that interest, not the principal, is taxed.
This topic, taught in full in the California Life & Health Insurance Producer Exam guide. California Life & Health Insurance Producer Exam — Complete Study Guide (2026) — PDF + EPUB, $19.99 · 14-day refund →
Practice all 716 questions free — no signup required.
Own the complete California Life & Health Insurance Producer Exam guide — PDF + EPUB, $19.99 →
Related questions on this topic
- Which 1035 exchange is NOT permitted on a tax-free basis?
- The main tax disadvantage of a Modified Endowment Contract (MEC) is that:
- The general rule that life insurance death proceeds are income-tax-free can be lost under the 'transfer-for-value' rule when the policy is:
- Premiums paid for personal life insurance are:
- The cash value inside a permanent life insurance policy grows:
- Life insurance proceeds may be pulled into the insured's taxable estate if, at death, the insured held:
Last reviewed: · editorial process
PrepPass team · Verified against California Life & Health Insurance License Exam · How we review
Reviewed by John Zihao Zhang — California-Licensed Life Insurance Agent (CA Dept. of Insurance License #4396095 — verify)