How are cash value increases in life insurance policies treated for taxation purposes?

Cash value increases in life insurance policies are treated as tax-deferred growth. This means that the policyholder does not have to pay taxes on the gains in the cash value as long as the money remains within the policy. This feature encourages individuals to save and invest in their life insurance policies without the immediate tax burden that would otherwise reduce their growth potential.

When a cash value life insurance policy accumulates value over time due to premiums paid and interest or dividends earned, those earnings are not taxed as income until the policyholder withdraws them. If the policy is cashed out or if it is surrendered for value, then the taxable gains would be considered. This tax-deferred status is a significant advantage of permanent life insurance products, allowing policyholders to grow their savings more efficiently.

Understanding that cash value increases are tax-deferred is crucial for strategic financial planning and for making informed decisions about life insurance products.