As a direct beneficiary of the life insurance policy, it would be tax free. You do not report it on your tax return and you will not receive a 1099 form for the proceeds. However, sometimes when there is a delay in the payment, there can be interest added to the proceeds. For example: A $25,000 policy pays $25,142. The $142. is interest. The interest only would be taxed and reported on your tax return on Schedule B as interest income.