What is the tax treatment of life insurance cash values, dividends, and death benefits?

The "interest build-up" portion of the annual increase in the policy's cash value is not taxed currently
to the policy owner. Dividends generally are considered to be a “return of premium” and
are not taxable to the policy owner. Although in the typical case, life insurance death proceeds
will not be subject to income taxation, these proceeds may be subject to federal estate taxation.
If the insured has any elements of ownership in the policy at the time of his/her death, the proceeds
are includible in the insured's gross estate for federal estate tax purposes. State inheritance
taxes and federal gift taxes may also apply to life insurance policies/proceeds under specific circumstances.

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