Generally, if you receive the proceeds under a life insurance contract because of the death of the insured person the benefits are not taxable 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.

However, if the policy was transferred to you for valuable consideration, the amount excluded from gross income, pursuant to IRC 101 (a) (1), shall not exceed an amount equal to the sum of the value of the consideration you paid for the transfer of the policy and other amounts you subsequently paid by the transferee.

References:

• Publication 525, Taxable and Nontaxable Income
• Tax Topic 422, Nontaxable Income