In which case do life insurance cash value gains become taxable income?

Life insurance cash value gains become taxable income when there is a withdrawal or surrender that exceeds the total premiums paid into the policy. This is due to the tax treatment of life insurance policies under the Internal Revenue Code. When you withdraw funds or surrender the policy, you receive the cash value that has accrued. The amount received that exceeds what you have paid in premiums is considered a gain and is taxable.

For example, if you have a permanent life insurance policy and you have paid $50,000 in premiums, but the cash value is now $70,000, if you withdraw $60,000, the taxable portion would be the difference between what you received and what you've paid in premiums. In this case, that is $10,000, which would be considered taxable income.

Other situations listed do not trigger the taxability of cash value gains in the same manner. For instance, the policy lapsing does not result in immediate taxable income unless there are gains involved at that time. Similarly, converting a policy typically does not itself create a taxable event unless certain conditions are met which would involve realized gains. Reaching a specific age, such as 65, has no direct relation to the taxation of life insurance gains.