Transfer-for-Value Rule

Last Updated: June 14, 2016

Definition - What does Transfer-for-Value Rule mean?

The transfer-for-value rule refers to a legal ruling declaring the death benefit of a life insurance policy transferred for some sort of material consideration as partially or fully taxable. The amount of the consideration paid, plus the subsequent premiums the recipient pays remain non-taxable portions of the death benefit.

Insuranceopedia explains Transfer-for-Value Rule

This transfer-for-value rule, in effect, forfeits the income tax exemption ordinarily enjoyed by recipients of life insurance proceeds and renders a large portion taxable. The regulation was passed to discourage the transfer of in-force life insurance policies among speculative investors who wanted to cash in on the huge tax-free windfalls.

However, there are some exceptions, as consideration can imply some fort of agreement, not necessarily an exchange of money. Moreover, transfers to the insured, the insured's partner, a partnership or corporation of which the policy is a partner or shareholder, and transfers in which the cost basis depends on the transferor's cost basis (i.e., an old company transferring a policy to the one) are exempt from this rule.

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