First, my lane: I'm a licensed insurance broker, not a CPA, so treat this as a map of the territory and take your specific questions to a tax professional. The map still helps, because the tax treatment explains most of why these policies get used the way they do.
While money sits inside the policy, growth isn't taxed. No 1099 arriving each year, no tax drag on the compounding. That's tax deferral, and plenty of accounts offer it. What makes life insurance unusual is the treatment on the way out.
Withdrawals from a non-MEC policy follow first-in, first-out ordering. Your own premium dollars come out first, tax-free, and only after you've recovered every dollar you paid in do withdrawals start counting as taxable gain. Most tax-advantaged accounts run in exactly the opposite order.
Policy loans aren't taxed at all while the policy stays in force, because borrowed money isn't income, the same reason a HELOC draw isn't income. This is the mechanism behind every "tax-free retirement income" pitch you'll hear, and the pitch is real as far as it goes. A word of caution: it goes exactly as far as the policy stays alive. If a policy lapses with a big loan outstanding, the IRS treats the forgiven loan as a distribution, and years of untaxed gain can land as taxable income in a single year, with no cash arriving to pay the bill. That's the trapdoor under every loan-heavy strategy, and managing it is most of the job. Loans also reduce your cash value and death benefit until they're repaid.
Two more markers on the map. The death benefit itself generally passes to your beneficiaries free of income tax, which is the oldest and largest advantage in the product. And a MEC, a policy funded past the IRS speed limit, loses the friendly ordering: gains come out first, and early distributions can catch a penalty. That line is bright and crossing it is permanent, which is why funding design gets so much attention around here. Details in The MEC Line.
None of this makes a policy a tax dodge. It makes it a tool with rules. Learn the rules and it behaves for decades. For plain answers to the other big claims you'll hear about these policies, our honest answers page takes them one at a time.