Final answer:
The cash value increases in life insurance policies are not taxed annually or immediately, nor only taxed at age 65, but instead grow tax deferred and are taxed upon withdrawal. This is similar to other retirement savings vehicles like 401(k)s, where funds grow tax deferred until they are withdrawn. The correct option is D.
Step-by-step explanation:
Cash value increases grow tax deferred in life insurance policies which means the cash value portion of a whole life insurance policy accumulates over time and is not subject to income taxes immediately. It’s only when the owner withdraws from the cash value or surrenders the policy that potential taxes may be incurred. This tax deferral is similar to other retirement savings vehicles, like 401(k)s, where taxes on the funds are deferred until withdrawal.
It's important for individuals to consider various methods of saving for old age, such as investing in stocks, bonds, and annuities, and understanding the tax implications of each. Defined benefit plans, like company pensions, promise a fixed income but can be eroded by inflation over time. By contrast, investments that grow tax deferred, like the cash value in life insurance policies, can provide an income or financial buffer in retirement without immediate tax liability.
Hence, Option D is correct.