DEFINITION of 'Transfer-For-Value Rule'

The stipulation that, if a life insurance policy (or any interest in that policy) is transferred for something of value (money, property, etc.), a portion of the death benefit is subject to be taxed as ordinary income. This portion is equal to the death benefit minus the item(s) of value, as well as any premiums paid by the transferee at the time of the transfer. For example, if John Doe sells his $250,000 life insurance policy that he has paid $10,000 in premiums on to Jane Doe for $5,000, the amount subject to income tax is $235,000 ($250,000-$10,000-$5,000).

BREAKING DOWN 'Transfer-For-Value Rule'

The transfer-for-value rule includes, but goes beyond, the outright sale of a life insurance policy. The life insurance policy does not lose its tax-exempt status when the policy is transferred to the insured, a partner of the insured or to a company where the insured is an officer or stockholder.

RELATED TERMS
  1. Life Insurance

    A protection against the loss of income that would result if ...
  2. Level Death Benefit

    A life insurance payout that is the same whether the insured ...
  3. Variable Life Insurance Policy

    A form of permanent life insurance, Variable life insurance provides ...
  4. Universal Life Insurance

    A type of flexible permanent life insurance offering the low-cost ...
  5. Permanent Life Insurance

    An umbrella term for life insurance plans that do not expire ...
  6. Decreasing Term Insurance

    A type of annual renewable term life insurance that provides ...
Related Articles
  1. Insurance

    Understanding The Insurance Transfer-For-Value Rule

    If you are banking on your life insurance payout being tax-free, you may be in for a surprise.
  2. Managing Wealth

    Life Insurance With an Increasing Death Benefit

    Why buy a life insurance policy with an increasing rather than level death benefit
  3. Financial Advisor

    Advising FAs: Explaining Life Insurance to a Client

    Life insurance was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death.
  4. Retirement

    Why Own Life Insurance in a Qualified Retirement Plan?

    What are the pros and cons of owning cash value life insurance in a qualified retirement plan?
  5. Financial Advisor

    Why the Wealthy Should Buy Lots of Life Insurance

    Wealthy clients have an enviable problem — managing, preserving and growing wealth. Properly structured life insurance can help with these goals.
  6. Managing Wealth

    Mistakes to Avoid When You Own Life Insurance

    How to avoid some common mistakes that can cause tax and inheritance problems when you own life insurance.
  7. Insurance

    Life Insurance: putting a Price on Peace of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  8. Insurance

    Tips for Helping Clients with Life Insurance Needs

    Life insurance needs will likely change over the client’s lifetime and again financial advisers can provide an objective sounding board.
  9. Financial Advisor

    How Life Insurance Settlements Are Evolving

    The life insurance industry marches forward by offering more ways that consumers can access the death benefits in their policies. Here's one of the newest.
Hot Definitions
  1. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  2. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  3. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  4. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  5. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
  6. Long Run

    A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all ...
Trading Center