Which statement is correct regarding Steve and his mother's accidental death and dismemberment policy?

The statement that the death benefit is not taxable income is correct because, under current tax laws in the United States, life insurance proceeds paid out upon the death of the insured are typically not included in the taxable income of the beneficiary. This applies to death benefits from accidental death and dismemberment policies as well. Beneficiaries can receive these funds tax-free, which provides financial relief at a difficult time.

In contrast, the taxation of insurance benefits varies based on the situation, but the general rule is that life insurance death benefits are exempt from income tax. It’s important to note that if there are any interest earnings accrued on the death benefit while it is being held before distribution, those interest amounts would be considered taxable income. However, the principal amount representing the death benefit itself remains non-taxable.