How is a life insurance policy treated for estate tax purposes if the named beneficiary dies before the policyholder?

When a named beneficiary of a life insurance policy dies before the policyholder, the treatment of the life insurance policy for estate tax purposes is indeed that the value of the policy is added to the estate and becomes subject to estate tax.

This occurs because the death benefit is considered part of the policyholder's gross estate if the beneficiary has predeceased the policyholder, and the policyholder retains control over the policy, which gives them an ownership interest. Since the policyholder is the individual whose estate is being taxed, and the policy proceeds can be payable to the estate if there is no surviving beneficiary, the full value of the policy will be factored into the calculation of the estate tax.

In contrast to the other choices, the value is not excluded from the estate nor is it treated as non-taxable simply because the beneficiary predeceased the policyholder. Understanding the implications of how life insurance benefits are treated upon the death of a beneficiary is crucial for estate planning and understanding potential estate tax liabilities.