Generally, not. This IRS FAQ states:
- Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, are not includable in gross income and you do not have to report them. However, any interest you receive is taxable and you should report it as interest received.
- However, any interest you receive is taxable and you should report it as interest received.
- If the policy was transferred to you for cash or other valuable consideration, the exclusion for the proceeds is limited to the sum of the consideration you paid, additional premiums you paid, and certain other amounts. There are some exceptions to this rule. Generally, you report the taxable amount based on the type of income document you receive, such as a Form 1099-INT or Form 1099-R.
State taxability issues depend upon the states involved. What is the state of residence and the state where the payment was issued?
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