As noted above, as the cash value in a policy grows each year, the owner of the policy is not currently taxed on the increase (i.e., gain).4 Thus, cash value life insurance is considered to grow “tax-deferred”. No current income tax is payable no matter how large the internal build up may be. As a result of this feature of cash value life insurance, it is one of the few tax-advantaged assets available and is often used by higher income individuals and businesses to alleviate their income-tax burden. For example, rather than invest in taxable mutual funds which can generate taxable dividends and capital gains, taxpayers may utilize cash value variable life insurance, which enables them to purchase similar market oriented funds within a tax-deferred wrapper.
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Reproduced with permission. Copyright The National Underwriter Co. Division of ALM