Generally, settlements received pursuant to non-personal injury litigation are includible into income under IRC Sec. 61. The issue is whether such income is in the nature of capital gain or ordinary income.
There is an exception provided under IRS Rev. Rule 74-251 which provides that your settlement proceeds would be treated as a recovery of basis. There are also several private letter rulings supporting this position. This necessarily presumes the life insurance contract is still owned by you and is in force.
The botXXXXX XXXXXne is that to the extent the settlement represents a refund of premiums, you would treat it as a reduction in your basis in the life insurance contract. Any amounts received for interest would be current taxable as interest income.
If during the litigation you previously sold (or let lapse) the policy, then your proceeds would be taxable (i.e the sale or lapse of an insurance policy is a taxable event). Generaly, the proceeds received would be treated as capital gain in this situation.
I recommend you seek out qualified tax counsel who can review the settlement document directly to ensure proper treatment of the proceeds you received. With the information above you have a head start on how they will likely be treated.
Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.