Life insurance taxation encompasses the rules that govern how premiums, cash values, policy loans, withdrawals, and death benefits are treated under federal and state tax law. In the United States, properly structured life insurance offers significant advantages: death benefits are generally income tax free to beneficiaries, cash value grows tax deferred, and policy loans or withdrawals to basis can often be accessed without current income tax if the policy is not a modified endowment contract. At the same time, complex rules under IRC Sections 72, 101, 7702, and 7702A dictate how policies must be designed to maintain favorable treatment and when distributions become taxable. Estate and gift tax rules determine whether death benefits are included in the insured's estate and how premium gifts are treated.

In practice, advisors encounter life insurance taxation when explaining why clients might use permanent policies for long term accumulation, legacy, or business planning. They must understand MEC rules to avoid designs that trigger less favorable income tax treatment of loans and withdrawals, and they work with attorneys and CPAs to position ownership so that large death benefits are outside the taxable estate when appropriate. Advisors also address the tax impact of surrendering policies, recognizing gain, or repaying loans. In business settings, they consider deductibility of premiums, taxation of death proceeds to corporations, and the impact of employer owned life insurance rules under Section 101(j). By mastering the fundamentals of life insurance taxation and collaborating with tax professionals, producers can design solutions that leverage tax advantages responsibly while avoiding unpleasant surprises for clients and beneficiaries.