How are the proceeds of life insurance policies generally treated under federal income tax laws?

The proceeds of life insurance policies are generally treated as nontaxable under federal income tax laws. This means that when a beneficiary receives a death benefit from a life insurance policy, that amount is typically not subject to federal income tax. The rationale behind this is to provide financial security to beneficiaries without imposing a tax burden at a time of loss.

There are certain circumstances where taxation could occur, such as in cases where the policy was sold for a profit, or if the policy includes cash value that has been withdrawn or borrowed against; however, the basic understanding is that the face value paid out upon the policyholder's death remains nontaxable. This favorable tax treatment encourages individuals to secure life insurance as a means of protecting their loved ones financially.