Is Life Insurance Cash Value Taxable?

When is the cash value in my life insurance policy taxable? As a general rule, so long as the cash value remains inside the insurance policy, it remains free of tax liability. But there are also several ways to remove cash value from a policy without owing taxes on the distribution. This includes withdrawal of cost basis and use of policy loans. If you surrender the policy with a gain, you'll owe taxes on the gain. You'll need to report the gain as ordinary income on your income tax return for the year in which you surrendered the policy. But, if you don't surrender the policy, and instead keep it until you die, you will never owe taxes on the gain achieved in the policy. The death benefit will go to your beneficiary income tax free.