IRC 101(c) provides that interest paid on life insurance proceeds (for example, during claim settlement or under interest-only options) is includable in gross income. While the principal death benefit may be excluded under 101(a), any interest component is generally taxable to the recipient. This distinction affects settlement option selection and post-claim reporting.

Where beneficiaries elect interest-only settlement, advisors warn that interest is taxable. They may propose alternatives that better fit cash-flow and tax goals.