One of the benefits of life insurance is that the death benefit received by the beneficiary is not included in taxable income.
Should the insurance company issue the death benefit in "checkbook" form, where the beneficiary receives a checking account in lieu of a lump sum, the insurance company would pay a small interest rate on the funds held on deposit. This interest would be taxable, but not the death benefit.
Life insurance income that can be taxable if the contract is a modified endowment contract or the life insurance cash values are annuitized. Universal life insurance policies issued after June 21, 1988 with gain in the contract that is governed under TAMRA could cause withdrawals to be taxed during the first 15 years of the policy. If the policy lapse before the death of the insured, all policy loans exceeding basis and internal policy loans are characterized an phantom income taxable at ordinary income rates.
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Should the insurance company issue the death benefit in "checkbook" form, where the beneficiary receives a checking account in lieu of a lump sum, the insurance company would pay a small interest rate on the funds held on deposit. This interest would be taxable, but not the death benefit.