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Insurance · Taxation

What is a key tax feature of the cash value growth inside a permanent life insurance policy?

Reviewed by Jordan Morley, Editorial Lead at 247SimpleTests. Written by the 247SimpleTests Editorial Team from the official source material cited on every question.

Correct answer

The cash value generally grows tax-deferred, meaning gains are not taxed as they accumulate inside the policy

  1. A The cash value generally grows tax-deferred, meaning gains are not taxed as they accumulate inside the policy
  2. B It is taxed at the time the policy is purchased
  3. C It is taxed annually as it grows
  4. D It is always tax-free when withdrawn

Why this is the answer

The cash value in a permanent life insurance policy generally grows on a tax-deferred basis, meaning the policyowner does not pay income tax on the gains as they accumulate inside the policy. Taxes may apply later depending on how the value is accessed: withdrawals up to the cost basis (premiums paid) are typically tax-free, while gains withdrawn beyond basis can be taxable, and policy loans are generally not taxed unless the policy lapses or is surrendered. This tax-deferred growth is a notable advantage of permanent insurance. (Tax treatment can change and depends on individual circumstances, so this is the general rule.)
Source: NAIC Model Outline, Cash Value Taxation

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About this topic: Taxation

Taxation questions cover the tax treatment of premiums, cash value growth, policy loans, death benefits, modified endowment contracts and 1035 exchanges. This is one of 8 Life Insurance questions on taxation, each with a full explanation on a single study page.

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