If a life insurance policy has a death benefit of $500,000 but earns 10% interest before payout, what amount is taxable?

In the context of life insurance, the general rule is that the death benefit paid to the beneficiaries is not taxable as income. However, any interest that accrues on the death benefit before it is paid out is subject to taxation.

In this case, the life insurance policy has a death benefit of $500,000 and earns 10% interest before payout. The interest earned prior to the payout must be calculated. If we assume, for example, that the interest is earned on the full $500,000 for a year, the interest amount would be $50,000, which is calculated as 10% of $500,000.

Thus, when the beneficiaries receive the payout, the death benefit itself—$500,000—remains non-taxable, but the interest earned during that period, in this instance, totaling $50,000, is taxable. Therefore, the correct answer regarding the taxable amount is the $50,000 earned as interest on the policy before payout.