292 / If a corporation takes out a life insurance policy on a person in whose life the corporation has no insurable interest, will death proceeds be exempt from income tax?
Under the 2017 tax reform legislation, the exceptions to the transfer for value rule do not apply if the policy was transferred in a transaction that qualifies as a reportable policy sale. See Q 279 for details.
There is danger that proceeds may be considered taxable income from a wagering contract instead of tax-exempt life insurance proceeds.1 If there is an insurable interest when a policy is taken out, the contract will not be considered a wagering contract, even if an insurable interest is not present at death.2 Insurable interest is determined by the laws of the various states. Consequently, if there is an insurable interest under applicable state law, death proceeds should qualify as life insurance proceeds under IRC Section 101(a).
1. Atlantic Oil Co. v. Patterson, 331 F.2d 516 (5th Cir. 1964).