What is the tax status of cash value growth in a life policy?

The cash value growth in a life insurance policy is considered tax-deferred. This means that as the cash value accumulates over time, the policyholder does not have to pay taxes on the gains until they are accessed or withdrawn. This feature is one of the significant advantages of permanent life insurance policies, such as whole or universal life insurance, as it allows for the growth of savings within the policy without the immediate tax burden. Once funds are withdrawn or the policy is surrendered, any amount above the premiums paid (the basis) may be taxable, but the growth while it remains in the policy is not taxed. This provides policyholders with more flexibility and potential financial benefits over time, as they can access funds without incurring tax liabilities on the growth during the accumulation phase.