Is the Cash Value of Life Insurance Taxable?

Types of life insurance policies with cash value

Here’s an overview of several cash value life insurance plans:

Whole life insurance

Whole life insurance is a type of plan that lasts for the rest of your life, assuming you continue to pay your premiums. It has a death benefit and secure cash value account, which grows tax-free. The premiums and death benefit will always stay the same.

Universal life insurance

Universal life insurance is a permanent life plan with a death benefit and cash value component that grows based on market rates. This policy is more flexible because it lets you adjust your premiums and death benefit amount as your circumstances change.

Variable universal life insurance

Variable life insurance is a permanent life policy that can give you the chance to choose how your cash is allocated and design your own investment strategy. Just like the other policies, it comes with a death benefit and cash value.

Final expense insurance

Final expense life insurance is designed to help your beneficiaries cover end-of-life expenses after you pass away, such as funeral costs, medical debts, or charitable contributions. This type of policy also builds cash value over time.

Is life insurance cash value taxable?

Fortunately, the cash value of life insurance grows tax-free. This means that, in many cases, you won’t have to worry about paying taxes on it. But there are some instances where you may owe taxes on the cash value.

When life insurance cash value could be taxable

In these situations, the cash value of your life insurance policy may come with a tax bill:²

Getting a policy loan

If you take out a loan from your life insurance plan, the loan won’t be taxable. The exception to this is if the policy terminates before you’ve repaid the loan. In this case, you might get hit with a tax bill.

Cashing out your policy

You’re able to withdraw up to the amount of the total premiums you’ve paid into the policy without paying taxes. But if you withdraw on any gains, such as dividends, you can expect them to be taxed as ordinary income.

Is a life insurance death benefit taxable?

In general, a life insurance benefit isn’t subject to taxes. But of course, there are a few exceptions to this rule. The type of policy you have, the size of your estate, and the way the benefit gets paid out to you will dictate if your life insurance benefits will get taxed. If you opt for monthly installments rather than a lump sum, for example, the funds that have yet to be distributed will accrue taxable interest. Also, if you plan to name your estate as a beneficiary, you may owe taxes as well.³ It’s a good idea to reach out to your tax advisor for more details on your specific situation.

Learn more about life insurance

While the cash value of life insurance isn’t usually taxable, there are some cases where you will have to pay taxes on it. Before you move forward with a policy, make sure you understand how it applies to your unique tax situation.

You can visit Aflac’s life insurance advice page to learn more about life insurance. If you’re interested in getting life insurance, start chatting with an agent and get a quote from Aflac today!