Tax-Free Benefits

• If you elect to receive the life insurance proceeds as a lump sum, you will not have to pay any federal taxes on the amount as long as the amount received is not greater than the policy's face value, explains WorldWideWebTax.com.
  
  

Interest

• If you elect a settlement option where you receive monthly installments while the principle continues to earn interest, any interest payments you receive are generally considered to be taxable income.
  
  

Cashing In Early

• If you own a life insurance policy that you may surrender for the cash value, any amount you receive that exceeds the amount that you have paid in premiums is normally considered taxable income. Likewise, if you elect to sell your policy to a third party, a transaction known as a viatical settlement, any profit above your total premiums also is taxable, according to the RTG Consultants website.
  
  

Whole Life

• You may own a whole life policy which accumulates a cash value over time. According to the New York State Insurance Department website, any interest or dividends earned during the life of the policy are not taxable if they are not more than the premiums that you have paid.