Do we have to pay income tax on life insurance?

In the United States, generally, proceeds from a Life Insurance policy paid out to beneficiaries are not taxable. There are, however, some exceptions. For instance, if the beneficiary is a person's estate, there might be tax implications.

If you have a flexible-premium policy and you make a large enough premium deposit, the IRS could consider your Life Insurance product a "Modified Endowment Contract", which eliminates most tax advantages. Your insurance company should notify you of this possible outcome before actually crediting your deposit to your premium.

Additional Life Insurance Information (http://en.wikipedia.org/wiki/Life_insurance). (Wikipedia)

Also, certain variable and/or universal life policies CAN be taxable when the portion of the premium that is in fact investment funds and the income generated from the investments are withdrawn from the account.