Death Benefit

• Beneficiaries typically don't have to pay income taxes on a life insurance death benefit. There are a few exceptions, though. One exception is if you own the policy; for example, you took out a life insurance policy on a parent because you'll be responsible for her final expenses. If you're the owner and beneficiary, the life insurance proceeds may be subject to estate taxes. You may also owe income tax if you're the beneficiary of a life insurance policy and you opt to have the proceeds paid out over time. Any interest the proceeds earn while being held by the insurance company is considered taxable income when paid out.
  
  

Policy Loan

• If the terms of your policy allow it, you can borrow against the cash value in a whole life or universal life policy. A policy loan isn't considered taxable income, so there are no taxes due. You can decide whether to pay back your policy loan, but if you don't repay the loan, it's subtracted from the death benefit with interest. This could substantially lower the death benefit.
  
  

Policy Withdrawal

• Universal life policies, in general, also allow you to withdraw cash value from the policy. A cash value withdrawal isn't taxable, provided that you don't withdraw any accumulated interest. If your withdrawal includes interest, the interest-based portion of your withdrawal is considered taxable.
  
  

Policy Surrender

• If you no longer need or want your life insurance policy, you can surrender it. If you surrender the policy, you no longer have the life insurance coverage, and you receive a check for any cash value within the policy, less any surrender charges. If the cash value exceeds the premiums you've paid, the excess is considered taxable income.