Retirement tax questions

In general, the death benefit you receive from your sister’s life insurance policy is not taxable income and does not need to be reported to the IRS. However, if the insurance company pays any interest earned on that money while they hold it, the interest is taxable. You should look out for a Form 1099-INT, which would only report that interest portion as income, if applicable.

See: Do I need to report life insurance? for more information.