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Level 15

1.  Yes - at least part of it.

2.  Yes

Ukraine - hang in there
Level 15

Sometimes yes, sometimes no.  When the payout exceeds the total premiums paid -- which happens often with older policies -- then the difference is taxable.  Sometimes the policy owner already has been getting an annual 1099R that represents the "dividends" paid on such policies.  These, of course, are not true dividends but just a return of premiums paid to a "mutual" insurance company that is "owned" by its policyholders. 

When the "dividends" have exceeded the premiums, the annual payments are taxable, even if they are "left on deposit" with the insurance company.  These companies hate giving up money, so they usually sign people up for having what amounts to a separate bank account. This accumulated cash can be withdrawn without tax consequence.  If the interest exceeds $10, the policy owner will get a 1099-INT.  The companies promised some low rate of interest back in normal times, and are losing money on some of these accounts that have a minimum rate.  

I just had a question about this a couple days ago, from a son who wanted to cash in the policies owned by his mother, in her 80s.  There were two policies, with total amount of about $10K.  Told him not to do it; not only would it be taxable, but it would increase how much of her Social Security is taxed.  In some cases, though, it's easier to cash out now than to have three or four beneficiaries file the paperwork for death benefits.  Not a "one size fits all" scenario.