Is life insurance taxable?

Under federal law, the life insurance death benefit your beneficiaries receive is generally not subject to income tax. Most states also do not tax death benefits at the state level.

There is one notable exception: estate taxes. The death benefit counts toward the value of your estate, so very large estates may owe federal estate tax above the exemption threshold.

The cash value inside a permanent policy grows tax-deferred, meaning you pay no tax as it grows. Withdrawals are generally tax-free up to your cost basis, the total premiums you paid. Anything above that may be taxable as income.

Borrowing against the policy using a policy loan is generally not a taxable event, but unpaid loans reduce the death benefit.

Tax rules can get nuanced, especially with large estates, business-owned policies, or surrendering a policy with large gains. A licensed agent or tax professional can help you structure coverage for your situation.