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.