If a policyholder chooses a lump-sum payment, which of the following is true?

When a policyholder selects a lump-sum payment, it's important to understand the tax implications that can arise from this choice. Generally, the proceeds from a life insurance policy are considered taxable if they exceed the total premiums paid into the policy. Therefore, the correct understanding is that taxes may indeed apply to the amount received in a lump-sum payment, particularly if the payout exceeds what the policyholder has invested.

This scenario reflects the nature of life insurance payouts and the Internal Revenue Service's guidelines regarding taxation. In the case of a death benefit, if the death benefit exceeds the premiums paid, the excess amount could be subjected to income tax, depending on how the insurance policy was structured and if any other conditions apply.

The other options either present incorrect information or misunderstand the nature of lump-sum payments. For instance, lump-sum payments are typically available under various policy types, are not contingent on surrendering the policy, and do not increase the benefit amount; they simply represent a different method of receiving the payout rather than an enhancement of the coverage. Understanding these tax implications is crucial for policyholders in making informed decisions about their insurance benefits.