Premiums are paid with after tax dollars—there is no deduction for premiums paid. Earnings on a permanent life insurance policy’s cash value are not taxed as long as the policy remains in force. However, if a policyholder gives up his or her insurance protection, earnings in excess of the total premiums paid are subject to tax. The beneficiaries of a life insurance policy are not obligated to pay federal taxes on the money they receive. Death benefits are free of federal taxes.