Life Insurance FundamentalsQuestion 145 of 716
How is interest credited to the cash value of a traditional whole life policy generally treated for income tax purposes while the policy is in force?
a.It is taxed annually at a flat 10% rate withheld by the insurer
b.It is taxed annually as ordinary income reported to the IRS on Form 1099-INT
c.It is treated as a long-term capital gain and taxed in each year it accrues
d.It is tax-deferred — not taxed as long as it remains inside the policy
Explanation
Cash value growth inside a non-MEC permanent policy is tax-deferred. It is not taxed each year while it stays inside the policy. Tax may apply later on amounts withdrawn above basis, or on a surrender that produces a gain.
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Reviewed by John Zihao Zhang — California-Licensed Life Insurance Agent (CA Dept. of Insurance License #4396095 — verify)