The cash value of life insurance offers many benefits. You may be able to tap into them while you’re still living and to help meet various financial goals. If you have a life insurance plan with cash value, you might be wondering if it’s taxable. The answer depends on your unique situation. Keep reading to learn more about cash value life insurance policies and how they impact taxes.
Cash value life insurance is a type of permanent plan, such as whole life and universal life insurance. With this type of policy, a portion of your premium payments goes toward the death benefit while the remainder build cash value, which will earn interest over time. As long as you continue to make premium payments, you can access the cash value while you’re still alive through a loan, withdrawal, or policy surrender.1
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Here’s an overview of several cash value life insurance plans:2
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 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 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 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.
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.
In these situations, the cash value of your life insurance policy may come with a tax bill:3
Typically, a permanent life insurance policy has a cash value component that grows tax-free. However, if you withdraw the cash, any amount that is more than the total premiums you paid toward the cash value will be taxable.
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.
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.
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.4 It’s a good idea to reach out to your tax advisor for more details on your specific situation.
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.
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1 Investopedia – 6 Ways to Capture the Cash Value in Life Insurance. Updated March 3, 2022. https://www.investopedia.com/articles/personal-finance/082114/6-ways-capture-cash-value-life-insurance.asp. Accessed April 21, 2023.
2 The Annuity Expert – What is Cash Value Life Insurance? How Does Life Insurance That Builds Cash Value Work? https://www.annuityexpertadvice.com/life-insurance-that-builds-cash-value/. Accessed April 21, 2023.
3 Forbes - Is Life Insurance Taxable? Updated January 4, 2023. https://www.forbes.com/advisor/life-insurance/is-life-insurance-taxable/. Accessed April 21, 2023.
4 Investopedia - Do Beneficiaries Pay Taxes on Life Insurance? Updated December 7, 2022. https://www.investopedia.com/ask/answers/102015/do-beneficiaries-pay-taxes-life-insurance.asp. Accessed April 21, 2023.
Coverage is underwritten by American Family Life Assurance Company of Columbus. In New York, coverage is underwritten by American Family Life Assurance Company of New York.
68000 series: In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC1368100, ICC1368200, ICC1368300, ICC1368400. In Delaware, Policies A68100-A68400. In New York, NY68100-NY68400. B60000 series: In Arkansas, Idaho, Oklahoma, Pennsylvania, Texas, & Virginia, Policies: ICC18B60C10, ICC18B60100, ICC18B60200, ICC18B60300, & ICC18B60400. Q6000 group whole life series: In Arkansas, Policy Q60100CAR. In Delaware, Policy Q60200M. In Idaho Policy Q60100CID. In Oklahoma, Policy Q60100COK. In Oregon, Policy Q60100COR. In Texas, Policy Q60100CTX. Q60000 group term life series: In Delaware, Policies Q60200C. In Arkansas, Idaho, Oklahoma, Oregon, Texas, Policies ICC18Q60200C, ICC18Q60300C, ICC18Q60400C. 65000 series: In Virginia, Policies ICC0965JTO & ICC0965JWO. B61000 series: In Arkansas, Idaho, Oklahoma, Oregon, Pennsylvania, Texas, & Virginia, Policies: ICC18B61JWO & ICC18B61JTO.
Aflac Final Expense insurance coverage is underwritten by Tier One Insurance Company, a subsidiary of Aflac Incorporated and is administered by Aetna Life Insurance Company.
The life insurance policy described herein contains an optional Accelerated Death Benefits Rider that is intended for favorable tax treatment under Section 101(g) of the Internal Revenue Code. Aflac does not give legal or tax advice. Please consult with a qualified legal, tax, and accounting advisor before engaging in any transaction. In AR, AZ, ID, OK, OR, PA, TX and VA: Policies ICC21-AFLLBL21 and ICC21-AFLRPL21; and Riders ICC21-AFLABR22, ICC21-AFLADB22, and ICC21-AFLCDR22.
This is a brief product overview only. Coverage may not be available in all states, including but not limited to DE, ID, NJ, NM, NY or VA. Benefits/premium rates may vary based on state and plan levels. Optional riders may be available at an additional cost. Policies and riders may also contain a waiting period. Refer to the exact policy and rider forms for benefit details, definitions, limitations and exclusions. For complete details, including availability and costs, please contact your local Aflac agent.
Content within this article is for informational purposes only and does not constitute legal, tax, accounting or medical advice regarding any specific situation. Aflac cannot anticipate all the facts that a particular employer will have to consider in their benefits decision-making process. This article contains a general overview and is not intended to portray any specific benefits or details of Aflac policies.
Aflac does not offer Universal or Variable Universal life insurance.
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