282 / Can an existing life insurance policy be sold to the insured without loss of the income tax exemption for death proceeds?

Yes.

Sale to the insured is an exception to the transfer for value rule ( Q 279).¹ For example, if a corporation purchases a policy insuring a key person and later sells it to the insured, the proceeds will be received wholly tax-exempt by the beneficiary despite the sale to the insured.² Moreover, a transfer to a trust that is treated as owned wholly or in part by the insured (such as a grantor trust) comes within the exception as a transfer to the insured to the extent the insured is treated as owner.³ An individual is treated as owner of a trust where the individual retains control over property the individual has transferred to the trust so that the income on that property is taxable to the individual under IRC Sections 671-679.

Where a policy is transferred more than once but the last transfer, or the last transfer for value, is to the insured, the proceeds will be wholly tax-exempt regardless of any previous sale or other transfer for value.⁴ If the insured transfers the policy for a valuable consideration, and the transfer does not come within any of the exceptions to the transfer for value rule, the proceeds again will lose their tax-exempt status.