Taxation of Cash‑Value Growth
Cash‑value accumulation inside a permanent life‑insurance policy grows tax‑deferred, meaning no income tax is due while the money remains in the contract.
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Withdrawals and Surrenders
When you withdraw cash, the amount up to your basis (total premiums paid) is tax‑free; any excess is treated as ordinary income and taxed accordingly.
Policy Loans
Loans against the cash value are not taxable as long as the policy stays in force; however, unpaid loans reduce the death benefit and may cause the policy to lapse, triggering taxable gain.
Death Benefit
The death benefit paid to beneficiaries is generally income‑tax free, regardless of the cash‑value buildup.
Taxable Events Summary
| Event | Tax Treatment | Notes |
|---|---|---|
| Cash‑value growth | Tax‑deferred | No tax until withdrawal or surrender |
| Withdrawal up to basis | Tax‑free | Basis = total premiums paid |
| Withdrawal above basis | Ordinary income | Taxed at marginal rate |
| Policy loan | Not taxable | Only if policy remains active |
| Policy lapse with loan | Taxable gain | Gain = cash value – basis |
| Death benefit | Income‑tax free | Beneficiaries receive net amount |