Which of the following statements is CORRECT regarding the tax treatment of a lump-sum payment to a life insurance policy's primary beneficiary?

The statement indicating that all proceeds from a life insurance policy’s lump-sum payment to the primary beneficiary are income tax-free is accurate. According to the Internal Revenue Code, the death benefit paid to the beneficiary is generally not subject to federal income tax. This tax-free treatment applies regardless of the policy's cash value or any premiums paid by the insured.

The rationale behind this tax treatment is rooted in the principle that life insurance is designed to provide financial security for survivorship and should not impose an additional tax burden at the time of the policyholder's death. As a result, beneficiaries receiving the lump-sum payment can use the funds without worrying about income tax liabilities.

For clarity, other options suggest scenarios in which proceeds could be taxable or partially taxable, but these do not apply to the primary beneficiary receiving the lump-sum death benefit. Thus, the correct view is that all proceeds are indeed income tax-free for the beneficiary.