Is the Cash Value of Life Insurance Taxable?

The cash value of life insurance offers many benefits. You may be able to access it while you're still living to help meet various financial goals. If you have a life insurance plan with cash value, you might be wondering if it's taxable. Keep reading to learn more about cash value life insurance policies and how they impact taxes.

3 min. read

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Key Takeaways

The cash value in many permanent life insurance policies grows on a tax-deferred basis, meaning taxes are typically not due while the value remains with the policy.
You can access the cash value of your policy through loans, withdrawals or policy surrender while still alive.
Many whole life, universal life, variable universal life and final expense policies include a cash value component that may accumulate over time.
Taxes may be owed if you withdraw more than the total premiums paid or if a policy loan is unpaid when the policy terminates.

How cash value life insurance works

Cash value life insurance is a type of permanent plan, such as whole life and universal life insurance. With this policy, a portion of your premium payments goes toward the death benefit while the remainder builds cash value over time. As long as you continue to make premium payments, you can access the cash value while you're still alive through the following: ¹

Policy loan
Withdrawal
Policy surrender

Types of life insurance policies with cash value

Here's an overview of several cash value life insurance plans:

Whole life insurance

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 a secure cash value account, which generally grows on a tax-deferred basis. For many of these policies, the premiums and death benefit will usually stay the same for the life of the policy.

Universal life insurance

Universal life insurance is a permanent life plan with a death benefit and a cash value component that may grow based on interest crediting methods. This policy is more flexible because it lets you adjust your premiums and death benefit amount as your circumstances change.

Variable universal life insurance

Variable universal life insurance is a permanent life policy that lets you choose how your cash is allocated and design your own investment strategy. Like the other policies, it comes with a death benefit and a cash value.

Final expense insurance

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.

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Is life insurance cash value taxable?

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.

When life insurance cash value could be taxable

In these situations, the cash value of your life insurance policy may come with a tax bill:¹

Getting a policy loan

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 may incur tax liability.

Taking policy withdrawals

You're generally able to withdraw up to the amount of the total premiums you've paid into the policy without paying taxes. But if you withdraw amounts that exceed the premiums you've paid into the policy, those amounts may be taxable as income.

Frequently asked questions

Is the cash surrender value of life insurance taxable?

The cash surrender value of life insurance may be taxable depending on how much you receive when you end your policy. When you surrender a permanent life insurance policy, you receive the accumulated cash value minus any applicable surrender charges or fees. If that amount exceeds the total premiums you've paid into the policy — known as your cost basis — the difference is generally treated as ordinary income by the IRS and may be subject to income tax.²

Will a life insurance payout affect SSDI?

A life insurance payout generally doesn't affect Social Security Disability Insurance (SSDI) benefits because SSDI is based on your disability status and work history. However, if you receive Supplemental Security Income (SSI) instead of or in addition to SSDI, a large lump-sum payout could affect your benefit amount since SSI does have asset limits.³ Speaking with a benefits counselor or tax advisor can help you understand the specific impact on your situation.

What's the difference between the cash value and the surrender value of life insurance?

Cash value is the total amount that has accumulated inside a permanent life insurance policy, including any interest or earnings. Surrender value is what you actually receive if you cancel the policy — it's the cash value minus any surrender charges, fees or outstanding loan balances.

Learn more about life insurance

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 applying for a policy, consult a qualified tax advisor or financial professional regarding your specific situation.

You can visit Aflac's life insurance advice page to learn more about life insurance. If you're interested in getting life insurance, start chatting with an agent and get a quote from Aflac today!

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