What are the tax implications of cash value growth in a Variable Life Insurance policy?

In a Variable Life Insurance policy, the cash value growth is subject to tax deferral, meaning that the accumulated cash value can grow without being taxed until the policyholder decides to access those funds through withdrawal or surrender. This tax-deferred growth allows the policyholder to benefit from the compounding of investment returns over time without the immediate tax liabilities that would otherwise apply to investment income.

When the policyholder finally decides to withdraw funds or surrender the policy, any gains in value above the premiums paid may be subject to income tax. However, as long as the cash value remains within the policy, it continues to grow without triggering tax consequences. This characteristic makes Variable Life Insurance an attractive financial tool for both investment and insurance purposes, allowing individuals to maximize growth potential while deferring tax liability until a later date.

In this context, the other options do not accurately represent how the tax treatment functions for cash value in Variable Life policies, as they either impose immediate tax implications or misunderstand the deferral feature inherent in such insurance products.