Which of the following statements about federal income tax treatment of life insurance is INCORRECT?

The statement regarding the entire cash surrender value being taxable is incorrect because the taxation of the cash surrender value depends on the policy's basis (the total amount of premiums paid into the policy). When a policyholder surrenders a life insurance policy, the amount received is generally the cash surrender value minus any premiums paid. This means that any amount exceeding the total premiums is subject to income tax. Therefore, only the portion that exceeds the total premiums paid is taxable, not the entire cash surrender value.

In contrast, the other statements accurately reflect the tax treatment of life insurance. Death benefits being typically tax-free for beneficiaries aligns with the tax laws governing life insurance, where the proceeds from a life insurance policy are not considered taxable income to the beneficiary. The cash value of permanent life insurance policies growing tax-deferred means that policyholders do not pay taxes on the growth of the cash value until it is withdrawn or the policy is surrendered. Lastly, lump-sum distributions to beneficiaries being tax-free is consistent with the tax laws, which classify these distributions as non-taxable income.