Tax-Free Proceeds Can Still Create Taxable Income

Death benefits are generally tax free, but interest earned on delayed payouts is taxable and can raise income for Part B and Part D premiums.
If a widow's usual MAGI is ~$105K, adding $10K of taxable interest can push her above the $109K single filer line for standard Part B.
At ~$115K MAGI, a single filer sees Part B add $81.20 monthly and Part D add $14.50, creating ~$1.1K yearly in extra premiums.
A spouse's death can support an appeal if household income fell, letting the agency review a newer lower income figure instead of an older return.
Before leaving proceeds with an insurer, check interest timing, estimate income near surcharge thresholds, and see whether taking funds sooner could limit taxable earnings.