Best practices - what category for life insurance payout?

First, I'm sorry for your loss.

In terms of payments from a life insurance policy, the money is generally not taxable with two basic exceptions: (1) if the insurance company has held the proceeds for awhile before transferring the funds to you, the interest earned during that time period is taxable; or (2) if the policyholder's beneficiary was an estate, and you're now receiving proceeds from the estate, you might be liable for estate taxes.

If those conditions don't come into play, then you can record the insurance payment pretty much any way you wish, because it doesn't impact your taxes. There are two basic ways you could do this in Quicken: for your purposes, do you want to see this showing as "income" on any reports you do, or not?

If you don't want to show this one-time receipt as income, but need a way to record the cash deposit in your checking account, you could use the category of "Adjustment". That's one of Quicken's special categories, which causes the transaction not to show up in reports as income or expense.

Alternatively, you could use and existing Quicken category or make your own. Among existing categories, you could record this as Personal Income>Gift Received. Or you could create your own category. I have ones for Misc. Income and Misc. Expense; I try to use them rarely, but there are sometimes these types of one-off events that don't cleanly fall anywhere else. You could create one for Life Insurance Beneficiary Proceeds, if you wanted to clearly label this for future reference, but I try to avoid creating a category which will only be used for a single transaction. In any case, any of these income categories  will show up in a Category report under income, but they will not show up on a Tax Schedule report because they aren't assigned to a category which is designated as tax-related.