Insurance Proceeds Interest (continued)

Exceptions

Two exceptions to the rules on interest payments from life insurance proceeds are:

1. If a taxpayer's insured spouse died before October 23, 1986 and the taxpayer receives the payments in installments, then the first $1,000 of interest income received each year is not taxed
   
   
   • This exclusion does not apply if proceeds are left on deposit with the insurance company and only interest is paid
     
     
2. Interest on insurance proceeds that have been left on deposit with the Department of Veterans Affairs (VA) is not taxable
   
   
   • Any open year return that reports VA proceeds interest as taxable can be amended for a tax refund