The policy’s growth in cash value may be tax-deferred.

• A. Taxable annually
• B. Tax-deferred
• C. Tax-free
• D. Taxed as capital gains when withdrawn

Answer: (B)

Growth in the policy’s cash value is tax-deferred. This means the gains inside a permanent life policy aren’t taxed as income each year; they accumulate inside the policy and continue to grow without current tax. Withdrawals or loans against the cash value can have tax consequences, typically only when you take out more than you’ve paid in (the cost basis) or if the policy lapses or is surrendered. This is why “tax-deferred” is the best description—the policy allows the cash value to grow without immediate taxation, unlike being taxed annually, being tax-free forever, or being taxed as capital gains when withdrawn.