< Back to Topic

The Tax Benefits of Cash Value Life Insurance

Natalie Montanez

Why it matters

  • Some forms of permanent life insurance policies feature a cash value savings component that may offer tax advantages you might not have considered.
  • Life insurance with cash value can help ensure that your loved ones are taken care of.
  • Whole life, universal life, and index universal life insurance policies can all have cash value, which can provide potential for tax-deferred growth. 

Most of us understand the basics of life insurance policies. You pay premiums to an insurance company in exchange for the assurance of future payment if someone who’s covered on your policy passes. These life insurance proceeds are generally tax-free for your beneficiaries.1 But some permanent life insurance products, including whole life, universal life, and index universal life insurance can include a “cash value” component that is separate from the death benefit most people would be familiar with. The policyholder can use this cash value in a variety of ways, and it can have even more tax advantages than you might realize. So, let’s take a closer look at those benefits.

Are life insurance premiums tax-deductible?

No matter the type of life insurance policy you buy, its premiums aren’t tax-deductible for individuals — even if you’re self-employed. The IRS considers these payments to be a personal expense, so you don’t get a tax break on them.2 However, they can sometimes be tax-deductible for companies.

The IRS generally lets companies deduct the amounts spent on employee benefit programs, and it considers life insurance policies to fall into that category. However, the IRS says a company can’t deduct “the cost of life insurance coverage for you, an employee, or any person with a financial interest in your business if you are directly or indirectly the beneficiary of the policy.”3

Are life insurance proceeds taxable?

If you’re considering buying a life insurance policy, you can rest easy knowing that the benefit you leave your beneficiary won’t be diminished by taxes in any way. Life insurance payouts received by a beneficiary aren’t considered gross income, and so they don’t need to be reported to the IRS.

However, there’s an exception to be aware of. If you’re the beneficiary of a life insurance policy and choose to have the benefit paid out at a later date (instead of immediately), the beneficiary will pay taxes on any interest the benefit earns while the insurance company holds onto it.4

Cash value life insurance tax benefits

Life insurance policies with cash value carry the same basic benefits of most life insurance policies — including a federal income tax-free death benefit. They can also include several additional tax benefits and built-in flexibility.5

With cash value life insurance, a portion of the premium is added to the cash value of the policy, minus any fees. That cash value can then earn interest based on the type of account the net premium is allocated to. But in general, you won’t pay any taxes on that increase in cash value over time unless you surrender the policy. In the case of index universal life insurance policies, the policy’s cash value is credited monthly or annually with interest based on an underlying index account. This can result in potentially higher cash value as the IUL may credit excess index interest greater than the guaranteed interest rate. Any guarantees are based on the claims paying ability of the issuing company.5 This can be helpful if you plan to withdraw the cash value of your policy after you’ve retired or have entered a lower tax bracket.

It's important to note that if you withdraw the cash value of your life insurance policy, it will reduce the policy value and may increase the chance of the policy lapsing. Policy loans are tax-free provided that the policy remains in force. If the policy is surrendered or lapses, the amount of the policy loan will be considered a distribution from the policy and will be taxable to the extent that such a loan plus other distributions at that time exceed the policy basis. If the life insurance policy is surrendered, there may be surrender charges associated. These charges may be significant and should be carefully considered before surrendering the life insurance contract. This may result in the cash surrender value of your policy becoming zero. 

Do you pay taxes on life insurance loans?

We all know that life can throw curveballs from time to time. If you’ve exhausted all other resources, taking a loan out of available cash value, if sufficient, from your life insurance policy can offer you financial security when you need it.6 Although there are some exceptions, you generally only pay taxes on amounts exceeding the total value of the premiums you’ve paid into the policy. If you’re considering a life insurance loan now or in the future, it’s a good idea to speak with a financial professional to understand the implications. There may be fees associated with taking a loan against your policy’s cash value.

To wrap up, cash value life insurance offers potential flexibility and tax advantages that you might not be thinking about — in addition to a death benefit that’s common to many life insurance policies. For example, any gains the cash portion of the policy makes over its lifetime accumulate and grow on a tax-deferred basis. And any loans you take out against the policy aren’t subject to income tax as long as you don’t exceed the basis of the policy. If you’d like to learn more about how a cash value life insurance policy might fit into your long-term plans, speak with your financial professional.

Things to consider

  • Add extra flexibility to your financial strategy with cash value life insurance.
  • Borrow up to the cash value of a cash value life insurance policy income-tax-free.5
  • Secure additional tax-deferral with cash value life insurance.5


1Life Insurance & Disability Insurance Proceeds,” IRS.gov, September 2022

2Are Life Insurance Premiums Tax-Deductible?” Insider.com, September 2021

3Publication 535 Cat. No. 15065Z Business Expenses For Use in Preparing 2021 Returns,” IRS.gov, February 2022

4Do Beneficiaries Pay Taxes on Life Insurance?” Investopedia.com, May 2022

5What Is Cash Value Life Insurance? Explanation With Example,” Investopedia.com, May 2022

6Cashing in Your Life Insurance Policy,” Investopedia.com, May 2022

Transamerica Resources, Inc. is an Aegon company and is affiliated with various companies which include, but are not limited to, insurance companies and broker dealers. Transamerica Resources, Inc. does not offer insurance products or securities. The information provided is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical or financial advice or guidance. Please consult your personal independent professionals for answers to your specific questions.