This is one other way that life insurance is taxed (but not really the insurance, just the interest-no different then what you get taxed on for interest in your bank accounts). If a company policy is more than $50,000 and your employer pays for everything above $50,000, it is a "benefit" and can be taxed. Say you have 5x's your salary in company paid for insurance and that comes to $500,000-$450,000 of that can be taxed.
The other way insurance benefits can be taxes is if the account is a Modified Endowment Contract (MEC). Semi-complicated but if you have a whole life insurance policy where you paid enough to get you over the ratio of payments to cash value it becomes a MEC and then is taxable.
Moral of the story-consult someone who knows the ins and outs of these things first BEFORE you (or parents) die and then after they die to get it distributed properly.
