It definitely CAN be! As long as the policy is set up correctly and everything is done properly, you can absolutely avoid paying any taxes. However, it is possible to trigger a taxable event.
There are 2 taxable events to avoid:
- Triggering a MEC / exceeding the IRS’s limit on the total amount you can put into a policy annually
- If this does occur, the policy will act very similarly to a 401K. The cash grows tax-deferred, but if you take any cash out, you will have to pay income tax and a penalty tax of 10% if you are under 59-½ years old, on any dividends you’ve earned.
- Having a policy lapse or cashing out
- If you loan out too much of the cash and the policy lapses, or you are done with the policy and you take out 100% of the cash value, you would receive a 1099 and the amount of interest earned throughout the policy will be taxed as regular income.