How is the growth inside a life insurance policy taxed if withdrawals are not made early?

• A. Taxed annually as ordinary income
• B. Tax-deferred growth; taxed only when withdrawals occur
• C. Tax-free growth for the lifetime of the policy
• D. Taxed at death only

Answer: (B)

Growth inside a life insurance policy accumulates on a tax-deferred basis. The cash value can grow year after year without current income taxes as long as you don’t withdraw funds. Taxes are triggered when you actually take money out through withdrawals or loans from the cash value, or when you surrender the policy. If you hold the policy until death, the death benefit is generally paid to beneficiaries income-tax-free, while the cash value remains within the policy and its tax treatment depends on withdrawals or loans taken during the insured’s life. So, the growth is tax-deferred and taxed only when withdrawals occur.