Transfer-For-Value Rule

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. Level Death Benefit

    A life insurance payout that is the same whether the insured ...
  2. Permanent Life Insurance

    An umbrella term for life insurance plans that do not expire ...
  3. Guaranteed Issue Life Insurance ...

    A type of financial-protection policy that provides cash to a ...
  4. Acceleration Life Insurance

    A type of policy that pays a portion (typically 25\% or 50\%) ...
  5. Amount at Risk

    The monetary difference between the death benefit paid by a permanent ...
  6. Accelerated Benefits

    A clause in certain life insurance policies that enables the ...
Related Articles
  1. Taxes

    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. Professionals

    Estate and Gift Taxation

    Estate and Gift Taxation
  3. Professionals

    MECs and Transferring For Value

    MECs and Transferring For Value
  4. Investing

    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.
  5. Insurance

    Life Insurance With an Increasing Death Benefit

    Why buy a life insurance policy with an increasing rather than level death benefit
  6. Home & Auto

    Intro To Insurance: Types Of Life Insurance

    By Cathy ParetoLife insurance protection comes in many forms, and not all policies are created equal, as you will soon discover. While the death benefit amounts may be the same, the costs, structure, ...
  7. Insurance

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  8. Financial Advisors

    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.
  9. Retirement

    Estate Planning: Life Insurance In Estate Planning

    by Cathy Pareto, CFP®, AIF® (Contact Author | Biography) Uses of Life InsuranceLife insurance is present in almost every estate plan and serves as a source of support, education-expense ...
  10. Options & Futures

    Permanent Life Policies: Whole Vs. Universal

    If you're looking for life-long security, choosing between these two is the key.
RELATED FAQS
  1. What is the difference between the death benefit and cash value of an insurance policy?

    Understand the difference between the various components of a life insurance policy including the death benefit and a policy's ... Read Answer >>
  2. What is the difference between term and universal life insurance?

    Term life insurance is the most basic of insurance policies. It is nothing more than an insurance policy that provides protection ... Read Answer >>
  3. What is term insurance?

    Term insurance is a type of life insurance policy that provides coverage for a certain period of time, or a specified "term" ... Read Answer >>
  4. How are life insurance proceeds taxed?

  5. How do I determine the face value of a life insurance policy?

    Read about how to determined the face value for any life insurance policy, and see what circumstances can trigger a change ... Read Answer >>
  6. How can I borrow money from my life insurance policy?

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center