If you do receive a form W-2 or 1099 which includes excludable income, report the taxable amount and include an explanation about the excluded portion.
In that case, the accelerated death benefits (meaning they are paid out before death) are fully excludable from income so long as the insured has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the certification.