The annual payments ($500) are probably not taxable. As proceeds from a settlement with the federal government, they are likely on account of harm (damages) done to the tribe and its members. Payments for damages are exempt from tax.
A "refund" is a return of your own money, not income. Unless he claimed the original payment as a business expense, he does not have to report the "refund" as income.
Life insurance proceeds (the principal) are not taxable and are not reported on a tax return.
Interest income from the trust holding those insurance proceeds is, as you are aware, taxable.
