Picture the policy as a tax-sheltered jar: money goes in after tax, grows without yearly tax, and the death benefit comes out income-tax-free. The exceptions are where exam questions hide.

1. Premiums: personal life insurance premiums are generally not tax-deductible. Death benefit: amounts paid to a beneficiary because of the insured's death are excluded from federal income tax, whether paid in one sum or otherwise. If the insurer holds the proceeds and pays interest (interest option, installments), the interest portion is taxable. 2. Cash value grows tax-deferred. On surrender or maturity, the amount received above the cost basis (premiums paid, less any untaxed amounts already received) is taxed as ordinary income. 3. Dividends are treated as a return of premium, so they are not taxable unless total dividends exceed total premiums paid. If you leave dividends with the insurer to accumulate at interest, the interest is taxable. 4. Policy loans are not taxable while a non-MEC policy stays in force. Watch out: if the policy lapses or is surrendered with a loan outstanding, the loan counts as an amount received and can create taxable gain. 5. Federal estate tax: the death benefit is included in the insured's gross estate if the insured held any incidents of ownership (for example, was the policyowner), if the proceeds are payable to the insured's estate, or if the insured transferred the policy within 3 years before death.