Transfer-for-Value Rule

What Does Transfer-for-Value Rule Mean?

The transfer-for-value rule is a legal principle stating that the death benefit of a life insurance policy when transferred in exchange for some form of material consideration, may become partially or fully taxable. However, the amount of consideration paid, along with any subsequent premiums paid by the recipient, remains a non-taxable portion of the death benefit.

Insuranceopedia Explains Transfer-for-Value Rule

The transfer-for-value rule effectively eliminates the income tax exemption that recipients of life insurance proceeds typically enjoy, making a significant portion of the death benefit taxable. This regulation was enacted to discourage the transfer of in-force life insurance policies to speculative investors seeking to profit from substantial tax-free payouts. Anyone considering a sale or assignment of a policy should first understand whether life insurance is taxable in their situation, because the tax treatment changes once consideration enters the picture.

However, there are exceptions. Consideration for a transfer can involve an agreement that does not necessarily include a monetary exchange. Additionally, transfers to the insured, the insured’s partner, a partnership or corporation where the policyholder is a partner or shareholder, and transfers, where the cost basis is based on the transferor’s original cost basis (e.g. when an old company transfers a policy to a new one), are exempt from this rule. For policyholders weighing a transfer, comparing options across the best life insurance companies can be useful when deciding whether to keep, sell, or restructure a policy.