It
depends. If you had a group policy that
was paid for by your employer or by pre-tax payroll deduction, then the
benefits are taxable and you would add to your income, thus increasing your taxable income. If, however, the
policy was an individual policy purchased by you (or a group policy) and the
premiums were paid for with after tax funds, then the benefits would not be
subject to federal income tax and there would be no effect to your taxable income. Please
see more on the question as answered by the IRS; Life
Insurance Disability Insurance Proceeds