In general, the proceeds from a life insurance policy paid to a beneficiary are not taxable and are not included as gross income on tax returns. However, any interest received is taxable and must be reported.
A beneficiary may have to pay estate taxes on a life insurance policy depending on the amount of the policy, the state where the deceased lived and the owner of the policy. As of 2013, federal estate taxes must be paid on life insurance benefits over $5.25 million if the policy was owned by the deceased. If the policy was owned by the beneficiaries, they would not owe federal estate tax.