The income reported on your 1099-R with Code 7 is normally taxable income, reported on your Federal return.
A 1099-R reporting a distribution for a lapsed insurance loan usually has Code L in Box 7 and is taxable income.
Illinois allows you to exclude most retirement income reported on your Federal return in the state interview, so your 1099-R may not be taxable.
Here's more info on Is Life Insurance Taxable?
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