I have received 1099-misc from insurance company for critical illness insurance payout. Does that mean the payout is taxable?

Generally, if the employer paid the premiums for the insurance policy, the benefits are taxable to you. Please see these links: 

https://www.irs.gov/publications/p15a/ar02.html (under 6. Sick Pay Reporting)

http://taxmap.ntis.gov/taxmap/pubs/p15a-005.htm

Thanks Isabella for the information. When I read the "Payments That Aren't Sick Pay(p15)", item 4 and 5 are more fit to our situation. Item 5.  Payments unrelated to absence from work. My spouse got severe illness and not myself, so the payment was for her and nor for me as the Critical Illness Insurance covers my family.  For item 4. Medical expense payments. Although the insurance payout is not restricted to medical or hospitalization cost, but the treatment cost is much higher than the payout amount. So the payout simply compensated our cost on the medical. Does my argument make sense to consider the critical illness insurance is not sick pay?

Thanks,

Sean

See this link under Sickness and Injury Benefits<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p525/ar02.html#en_US_2015_publink1000229310">https://www.irs.gov/publications/p525/ar02.html#en_US_2015_publink1000229310</a>

These benefits are considered taxable if your employer paid for the premiums and not you.

While the "tip" says "Do not report as income any amounts paid to reimburse you for medical expenses you incurred after the plan was established,"  if the payments weren't specified as medical reimbursements, you can't really exclude the income. However, you could take a medical expense deduction for the amounts that you paid out of these insurance proceeds.

How/where in the tax return do you record the medical expenses related to this type of a payout?

If you itemize, they are deductible on Schedule A as a medical expense.

You can deduct the portion of medical expenses that exceeds 7.5% of your adjusted gross income (AGI) for 2019.