Your original expert here.
So sorry for the confusion. The second answer above is completely wrong....
You said you "cashed in" the policy.
What I have described is EXACTLY what happens when one cashes in a policy for it's cash value.
What this other answer describes is what happens when you receive the death benefit
(sometime referred to as proceeds) from a policy, as it's beneficiary
Hope this helps to clarify.
If you DID indeed receive the proceeds as the policy's beneficiary then the proceeds are tax free, ...
... but when you "cash in" the policy, the taxation
(1) the policy's basis (and how it compares to the cash value you received by cashing it in, and
(2) whether you are under or over age 59 and 1/2.
Here's the IRS guidance on this (from http://www.irs.gov/uac/Taxable-or-Non-Taxable-Income%3F-1 )
"Life insurance - If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are generally not taxable unless the policy was turned over to you for a price."
Pleas let me know if you have any questions at all...