Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
How is the growth of cash value within a permanent life insurance policy treated for federal income tax purposes while the policy remains in force?
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Cash value accumulation inside a life policy grows tax-deferred: no tax is due on the interest, dividends, or other earnings credited while the policy stays in force. Taxation is deferred until money is withdrawn or the policy is surrendered, at which point amounts received in excess of the owner's cost basis are taxable. This tax-deferred growth, combined with the income-tax-free death benefit, is a key advantage of permanent life insurance as a long-term savings vehicle.
Why the other options are wrong
- B) Earnings are not taxed annually; deferral until distribution is what distinguishes life insurance from ordinary taxable investments.
- C) Cash value growth is not taxed annually as a capital gain; gains are recognized only when a distribution exceeds the cost basis.
- D) Tax deferral is not a permanent exemption; surrendering the policy for more than the cost basis creates taxable gain.
Memory hook
Cash value grows tax-deferred — the IRS invoice arrives only when you take the money out.