Is the Cash Value of a Life Insurance Policy Taxed?

Answer:
When you purchase a life insurance policy that

has a cash value tied to it, a portion of the premiums that you pay go into the cash value component. The cash value grows on a tax-deferred basis. Because much of the cash value accumulates due to funds that you have put into it through premiums you will not be taxed on the money that you paid into the account. The gains your money has earned through investments may be taxable.

For example, if you’ve paid $10,000 into the cash value portion of the policy through premiums and the cash value grows to $30,000 you may have to pay taxes on the $20,000 of investment earnings if you surrender the policy for its cash value.

In addition, if you take out a loan against the cash value but don’t pay it back and surrender the policy or allow it to lapse, you will be taxed on the difference between what you have paid in premiums and the loan amount.

Because the money grows tax deferred, the taxes aren’t due until you cash in the policy.


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