Taxation of Life Policies

Life insurance has unique tax benefits.

The taxation of life insurance policies varies depending on the particular area of concern. The areas of concern are cash value growth, borrowing against cash value and the distribution of proceeds.

Cash Value Growth

The two basic types of life insurance are term insurance and cash value. With cash value life insurance, a portion of the monthly premium paid into the policy is placed into a savings or investment account. The interest and dividend income earned from this account grows tax deferred as long as the policy remains in force.

Borrowing

The owner of a cash value life insurance can borrow against the cash value without having to pay taxes on the amount borrowed. This is because borrowing qualifies as a loan, and loans are not taxed.

Distribution of Proceeds

Life insurance proceeds are not taxed. In addition, life insurance passes directly to the beneficiary without going through probate. For this reason, life insurance has always been considered a premium estate planning asset where people are encouraged to keep life insurance their whole lives. This is why the original cash value policy is called "whole life."

References

• Lifeinsurance.net:: Taxation of Life Insurance Policy Distributions
• Benefithouse: How are life insurance cash values and death proceeds generally taxed