A beneficiary receives a $300,000 lump-sum life insurance death benefit from a policy that was...

B is correct. Under the general federal income-tax rule, life insurance proceeds received by a beneficiary because of the death of the insured are ordinarily excluded from gross income . The IRS specifically states that beneficiaries generally do not report such death proceeds as taxable income.

The beneficiary's relationship to the insured does not determine this basic exclusion. A family member, unrelated individual, corporation, or other qualifying beneficiary may generally receive death proceeds under the same core rule. The scenario also states that the policy was not transferred for value , avoiding an important exception that can limit the tax exclusion when a life policy has been transferred for valuable consideration.

A separate tax issue can arise when an insurer retains the death proceeds and pays interest. The IRS states that interest received in addition to the death benefit is taxable interest income , even though the underlying death benefit itself remains excluded under the general rule.

Therefore, neither ordinary-income taxation of the entire benefit nor capital-gains treatment applies to the straightforward lump-sum death benefit described.

Reference topics: Federal Tax Treatment of Life Insurance; Death Benefits; IRC §101; Transfer-for-Value Rule.

===============