According to the Internal Revenue Service, or IRS, life insurance proceeds paid out due to the death of the insured person are not taxable unless the policy has been turned over for a price. Interest income resulting from life insurance proceeds may be taxable.
Life insurance policies can be paid out in different ways, including in lump sums or intervals. If paid in a lump sum, the IRS requires the beneficiary to include in his income the benefits that exceed the amount payable upon the insured person's death. The IRS also states that if a beneficiary receives payments in installments, she can exclude part of each installment from her income. This number can be found by dividing the amount held by the insurance company by the number of installments to be paid. Anything over this amount is interest and must be included as income. The IRS website offers additional details regarding particular situations.