In general, amounts received by a beneficiary as death benefit proceeds under a life insurance contract are excludable from the beneficiary's income. This is the applicable rule where payment is made to the estate of the insured or to a designated beneficiary and whether paid directly or in trust. Recently, regulations have been proposed that would allow the payment of benefits prior to death without income tax liability to the recipient if death is expected to occur within 12 months.
A greater concern is the income tax treatment of policy proceeds where the life insurance is transferred not as a gift but for value.
Harl, Neil E.
"Transferring life insurance policies for consideration,"
Agricultural Law Digest: Vol. 4
, Article 1.
Available at: http://lib.dr.iastate.edu/aglawdigest/vol4/iss7/1