H—Transfer for Value Rule

The transfer for value of a life insurance contract jeopardizes the income tax-free payment of its proceeds. Under the transfer for value rule, if a policy is transferred for a valuable consideration, the death proceeds will be taxable as ordinary income, except to the extent of the consideration, the net premiums and certain other amounts paid by the transferee.

The transfer for value rules extend far beyond outright sales of policies. The naming of a beneficiary in exchange for any kind of valuable consideration would constitute a transfer for value. Consideration does not have to be in money, but could be an exchange of policies or a promise to perform some act or service. However, the mere pledging or assignment of a policy as collateral security is not a transfer for value.

Specific exceptions to this rule allow a transfer for consideration to be made to the following, without jeopardizing the income tax-free nature of the death benefit: