A client asks you to explain the statement "Life insurance proceeds are tax free". You answer that the general rule(s), subject to some exceptions, is/are that death benefits received from a life insurance policy due to the death of the insured are income tax free to the beneficiary, but which of the following is also correct:

1. the proceeds are subject to estate taxes in the estate of the insured if the insured is the owner.

2. the proceeds may be subject to income taxes if the policy was sold to a third party.

3. the proceeds are not subject to income tax, even if sold to a third party if the contract is a modified endowment contract.

Select one:

a. 1 only

b. 2 and 3

c. 1 and 2

d. 1, 2 and 3