Is Interest Earned On A Life Insurance Policy Taxable? 
When discussing the topic of taxes always consultant your account . However , the basic rule of thumb with life insurance goes like this . A death benefit set up properly by your agent should not be taxed . On term life insurance there is no cash value so the only benefit is the death benefit . On permanent life insurance plans such as whole life and universal life insurance , these plans do build a cash value that does earn interest . However , this is tax deferred interest , meaning as long as the plan is in force there is no tax on gains . When you withdraw funds from the cash value , you will have two options with two different tax consequences . The first is if you cancel or lapse the policy and take the cash value , then yes , these proceeds or interest are taxed as income . However , if you borrow from your own cash value , then the IRS sees this as a loan and the funds are now tax free . I recommend speaking to your agent or advisor to avoid a costly mistake . The second loan aspect would almost always be preferred over cancellation to avoid taxes . 