Under current Internal Revenue Service (IRS) and Canada Revenue Agency (CRA) guidelines, insurance policies receive many favorable tax advantages.
Tax-Free Death Benefit
Should the insured die the entire death benefit, including the cash value, is income-tax-free to the beneficiary.
Tax-Deferred Earnings
You do not pay taxes on gains in the policy. Tax is deferred until you decide to surrender the policy, the policy has lapsed, or when certain distributions occur.
Tax-Free Withdrawals
When the cash value in the policy is sufficient, premiums paid into a policy can be taken as tax-free withdrawals up to your cost basis in the policy. This is the premium you paid with after-tax dollars.
Tax-Free Loans
Besides the withdrawals, you can take more money out of the policy in excess of your basis (your paid premiums) through tax-free loans with a very low net effective rate.
When you take a loan from the insurance company, they will take the same amount of the loan from your cash value and transfer it to a loan reserve account. They will charge you interest on the loan. However, the loan reserve earns interest. This is an excellent feature when you need to access your money.
As long as you stay within the IRS guidelines, the withdrawals and loans can be taken without federal income tax liability.
In Canada, insurance policies generally receive favorable tax treatment, and funds are sheltered from taxes. Individuals should consult with their tax professional and their insurance agent for additional information, specifically in regards to policy loans.