Question:   Are proceeds paid under a life insurance contract taxable and do they have to be reported as income?

Answer:   Generally, if you receive the proceeds under a life insurance contract because of the death of the insured person, the benefits are not includable in gross income and do not have to be reported:

• Any interest you receive would be taxable and would need to be reported just like any other interest received.
• If the policy was transferred to you for cash or other valuable consideration, the exclusion for the proceeds is limited to the sum of the consideration you paid, additional premiums you paid, and certain other amounts.
• There are some exceptions to this rule. For additional information, see Publication 525, Taxable and Nontaxable Income.