Does life insurance get taxed? 
There are several federal tax benefits to owning life insurance . The most obvious is that the death benefit passes to the policy beneficiary income tax free . This doesnt just apply to individuals but can apply to a business , a trust , or an estate as well . When the insurance is owned by a third party or an irrevocable trust it will may also bypass estate taxes . When an owner needs to withdraw money from a policy by surrendering the policy the money that is withdrawn receives favorable tax treatment and only that portion that is in excess to the premiums paid becomes taxable . You can take out federal income tax-free loans from a permanent life insurance policy . The loans may reduce the death benefit and are limited by the cash value of the policy . When loans are taken the proceeds are not subject to the 3.8 % passive income tax rule of the Affordable Care Act -LRB- ACA -RRB- These loans will not affect income taxes on your social security benefits and they do not affect the FAFSA application for student funding . Increasingly policies have provisions that allow the owner to withdraw funds to pay for certain long term care expenses . This is usually free of federal income tax . Discuss this more closely with your insurance agent as different company designs will result in varying taxation . There are tax free transfers available to holders of permanent insurance policies that allow growth in excess of premiums paid to be transferred to other insurance and annuity contracts without incurring a current tax obligation . Of course , death eliminates all taxes on deferred growth . 