Life insurance payments to beneficiaries is almost never taxable income. If the payout earned interest or dividends between the date of her death and the date the payment was made to you, that interest or dividends is taxable income but it should be a small amount. Since tax was withheld you will report this on your tax return and if the tax withheld is more than you owe, it comes back to you as a refund (more precisely, your refund is the result of all your taxes, and all your payments, so this gets folded into that calculation.)
Payouts on some kinds of investment contracts might be taxable. And if you are the beneficiary of an IRA, 401(k), pension, or other qualified retirement account, and take a lump sum, that is definitely taxable.
Do you have more information on exactly what type of instrument this was? Term life, whole life, pension, or something else?
