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 on your individual tax return.
But, any interest you receive on the proceeds 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 exclusion for the proceeds is limited to the sum of the consideration you paid, additional premiums you paid, and certain other amounts. This is not generally applicable to most individuals as very rarely individuals will purchase somebody else's policy!
For a more detailed explanation on this topic please refer to IRS Publication 525.
http://www.irs.gov/pub/irs-pdf/p525.pdf
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