Life insurance payouts are generally not subject to income tax. The money received from a life insurance policy is typically considered a death benefit and is therefore not taxable as income. This means that beneficiaries do not have to report the life insurance proceeds as taxable income on their federal tax returns. However, there are a few exceptions to this general rule. If the policyholder had previously deducted the premiums paid for the life insurance policy as a business expense, then a portion of the payout may be subject to income tax. Additionally, if the policyholder sold the policy to a third party for a cash settlement, the proceeds may be partially taxable. It's important to consult with a tax professional or financial advisor to understand the specific tax implications of a life insurance payout in your situation.