Pearson VUE Life Insurance Practice Exam 2026 - Free Life Insurance Practice Questions and Answers.

When discussing life insurance policy benefits being paid out tax-free to beneficiaries, the correct answer highlights the tax treatment of these benefits. Life insurance policies typically provide a death benefit that is paid out to the designated beneficiaries upon the insured's death. Under current federal tax law, these death benefits are generally received free of income tax by the beneficiaries. This principle is foundational to the purpose of life insurance, which is to provide financial protection and stability to dependents or heirs.

The term "Tax-Free Transfer" refers to this specific situation, where the death benefit does not incur taxation at the time of distribution to beneficiaries. This tax-free status serves as a significant incentive for individuals to maintain life insurance policies, ensuring that their loved ones receive the full financial support intended without the burden of immediate tax liability.

Other options relate to different aspects of taxation in financial contexts. Tax Deferral refers to the postponement of tax liability until a later date, often applicable to certain retirement accounts but not directly relevant here. Taxable Gain involves situations where profits from investments are subject to taxation, which does not describe the benefits from a life insurance policy. Transfer for Value refers to a situation where the death benefit is subject to taxation if the policy is sold or transferred for valuable consideration prior to