Tenth of an Hour, Episode 99: The Life Insurance Transfer-For-Value Rule

Generally, life insurance proceeds are excluded from a beneficiary's gross income for income tax purposes. This reflects a tax policy of not punitively taxing supplemental cash needed by a dependent, similar to the exclusion not taxing inheritances. However, where existing life insurance policies are purchased or exchanged for valuable consideration, this policy goes away, and the IRS taxes the policy as more of an investment. Such taxation is colloquially known as the "transfer-for-value" rule.


In this presentation, we discuss the effect of the rule on the taxation of life insurance proceeds, while also highlighting the exceptions (and one exception-killer) to the application of the transfer-for-value rule.