Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 1/5
Which statement about the federal income taxation of an individual's personally owned life insurance policy is correct?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Premiums paid on a personally owned life insurance policy are generally not deductible for federal income tax purposes because life insurance is considered a personal expense. In exchange, the cash value grows on a tax-deferred basis; no income tax is due on the accumulation until amounts are withdrawn, and only the gain above cost basis is taxable. This tax-deferred build-up is one of life insurance's key advantages.
Why the other options are wrong
- B) Personal life insurance premiums are not tax deductible; only certain business-paid premiums or employer contributions receive favorable treatment.
- C) Cash value growth is not taxed annually; taxation is deferred until a distribution occurs.
- D) This combines both incorrect halves: premiums are not deductible, and growth is deferred, not currently taxed.
Memory hook
No deduction on the way in, no tax on the growth while it grows; pay tax only when you pull gains out.