I don't know why the IRA/Simple/SEP box was checked, nor do I know what kind of Rider your had been attached to his whole life policy - there are lots of different riders that can be added to a whole life insurance policy. It must have been some type of annuity (which is an insurance contract). Annuity withdrawals made before you reach age 59½ are typically subject to a 10% early withdrawal penalty tax. If the funds in the rider were pre-tax, then 100% of it would be taxable and subject to the 10% penalty. Annuity products in general, are taxed the same way as an IRA in many instances, so the way your distribution is being taxed is not surprising. The best way to get an explanation about how the distribution was taxed, and why, would be to contact the insurance company.
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