Transfers for Valuable Consideration

Tax Issues when Transferring a Life Insurance Policy

Andrew I. Shapiro, MSM, CLU, ChFC

Many people believe that life insurance proceeds are received by a beneficiary free from income tax (Internal Revenue Code [IRC] section 101[a][1]), regardless of whether the underlying policy is an individual policy, a group policy, a cash value policy, or a term policy. Although individuals rarely look to see if there are exceptions to this rule, they do occur—most frequently through violations of the transfer-for-value rule. Recently, this author has seen an increase in inquires concerning the transfer of ownership of a life insurance policy, thereby increasing the possibility of subjecting the death benefit to income taxation. Some of these inquiries concern individuals exploring the option of transferring ownership of a policy because of the impending reduction in the estate tax exemption; some involve transferring policies owned by a business or used to fund a buy-sell agreement; and others are just run of-the-mill policy transfers that wouldn't otherwise merit a second glance.