39 / How is gain on the sale of a term life insurance policy calculated after 2008? How did the 2017 tax law change the rules governing gain on the sale of a life insurance policy?
Editor’s Note: The 2017 tax reform legislation reversed the IRS position in Revenue Ruling 2009-13, and instead now provides that in determining basis, no adjustment is made for mortality, expense or other reasonable charges incurred under the contract (the “cost of insurance”) in the case of a policy sale. Therefore, on sale of a term life insurance policy, the insured’s basis is no longer reduced by the cost of insurance.1 This new rule for determining basis is effective retroactively, to transactions entered into after August 25, 2009.2
Revenue Ruling 2009-13 explained how to calculate the amount and character of gain upon the surrender or sale of a life insurance policy by the insured.3 The example below illustrates the results upon the sale of a term life insurance policy (Situation 3), as previously enforced by the IRS. However, as noted in the editor’s note above, the IRS position has explicitly been superseded by statute. For examples illustrating the results upon surrender of a cash value policy or the sale of a cash value policy, see Q 37 and Q 38.
Revenue Ruling 2009-13: Situation 3
In Situation 3, the IRS took the position that the cost of insurance protection must be subtracted from the premiums paid. This position is no longer valid, and the cost of insurance may not be subtracted.