I had always thought that life insurance proceeds were not treated as taxable income. From IRS publication 525:
Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price. This is true even if the proceeds were paid under an accident or health insurance policy or an endowment contract. However, interest income received as a result of life insurance proceeds may be taxable.
However, when I Google "life insurance proceeds estate tax", lots of scary-looking legal advice comes up, suggesting complex estate tax planning. It's not clear to me whether this is a valid concern.
I'm not looking for a treatise on the estate tax; I just want to know: if my wife and I were to pass away, would our children have to pay taxes on our life insurance proceeds, or not?
Edit: Adding a bounty as we have two contradictory answers with the same number of upvotes.