Is Variable Life Insurance Taxable? 
Only in certain situations . Let me explain : If you purchase a variable life insurance policy , or a permanent policy that builds cash value inside it , you are funding that policy with after tax dollars . Meaning , you have already paid taxes on that money -LRB- income tax -RRB- . The money that continues to build and grow inside of that policy is tax deferred . If you decide to take cash out of that policy , lets say to buy a car , that is going to be considered a withdraw . You will only pay taxes on the amount that exceeds your cost basis -LRB- or the amount you have put in -RRB- . So it holds true , the longer you have your policy , the greater the cost basis will be . Instead of a withdraw from you cash account , their is another option to ` loan ' yourself the money . Much like you would from a bank or lender . There are several factors to be mindful of when you make yourself a loan from you policy . For example , if you loan yourself money that is the same amount , or exceeding the amount that is in the policy -LRB- cash in the policy -RRB- , you could be subject to ` income tax ' , which is higher than capital gains tax . There are any moving parts to this question , and is somewhat difficult to give an answer that will blanket everyone . But REMEMBER , the death benefit of the variable policy is paid to the beneficiary TAX FREE . Assuming that their are no estate taxes to contend with . As with any life insurance policy , it is best to set down and speak with a professional on the matter . It 's better to plan and know what to expect than to be surprised by a large tax bill ! 