Below are some quick and dirty rules for taxation of life insurance.
- Proceeds from a life insurance policy are excludable from gross income.
- Interest earned on life insurance proceeds is not excludable from gross income.
- If the TP receives both proceeds and interest, prorate each payment evenly, reporting only the portion of the payment that is interest.
- If the TP elected to receive payment over his life and:
- lives beyond his life expectancy: continue to prorate
- passes away sooner than life expectance: no deduction for unrecovered policy proceeds