Does life insurance get taxed? 
The death benefit of a life insurance policy passes to the beneficiary tax free . However , in the case of a cash value policy there may be tax due on the money that has grown more than the premium paid . Of course , in most life contracts the beneficiaries do not get the cash values upon death of the insured as they go back to the company upon death . This makes whole life insurance a very bad investment and guarantees the insured to be underinsured . Life insurance should always be separated from money invested by purchasing level term life insurance and investing the difference . If you have a whole life policy and change to a cheaper term policy the cash values does n't have to be lost as they can be transferred into a growth vehicle such as an annuity where it will grow tax-free and probate-free . 