Is the final expense insurance payout taxable to the beneficiary?

What it means

• The IRS FAQ on life insurance and disability insurance proceeds states: "Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them." IRS Publication 525 (Taxable and Nontaxable Income) covers the same territory in more depth.
• There are narrow exceptions that can create taxable income — for example, if the policy was transferred for value, if proceeds are paid in installments and include interest (the interest portion is taxable), or if the death benefit is paid to the estate and the estate is large enough to be subject to federal estate tax. These are edge cases; for a typical final expense policy paid as a lump sum to a named individual beneficiary, the check is not taxable federal income.
• State income tax generally follows the federal rule but is set state by state. When in doubt, consult a tax professional.