assignment of life insurance policy tax consequences

TAX CONSEQUENCES OF TRANSFERRING LIFE INSURANCE

Business and family relationships change over time. When that happens, people may need to move a life insurance policy from one person or entity to another. This requires careful review to ensure client objectives remain achievable.

Typically, when ownership of a life insurance policy changes, the original owner reports a fully taxable policy gain equal to the excess of the proceeds of disposition over the owner’s adjusted cost basis (ACB) in the policy. Losses cannot be recognized. The original owner also files an absolute assignment form with the life insurance carrier to register the change in title. The form identifies the new owner, the relationship between the old and new owner and the value of the transaction.

There are four exceptions to this general rule. In these cases, there can be a rollover of the policy, with no immediate tax consequences.

01 Transfer to a spouse or common-law partner. The transferring spouse is deemed to receive proceeds of disposition equal to the policy’s ACB while the receiving spouse is deemed to pay an amount equal to the transferring spouse’s ACB.

Tax-deferred transfers between spouses/common-law partners may occur while both people are alive, or between a deceased’s estate and the surviving spouse/common-law partner. When the transfer is between spouses/common-law partners, there’s an automatic rollover, unless they elect to opt out.

02 Transfer of policy on the life of a child. This can be a valuable opportunity for parents when they purchase a policy on their young child and later transfer ownership to the child as an adult.

Parents can also transfer a policy on the life of one child to another. For example, a grandparent could purchase a policy on the life of a grandchild and later transfer title to the grandparent’s child (the life-insured’s parent). This can help ensure control of the policy remains with the grandparent or parent until the grandchild is mature enough to assume ownership of the policy.

This works while the parent/grandparent is alive and can sign the appropriate forms to register the change of ownership with the life insurance carrier. There can’t be a rollover from the parent/grandparent’s estate to the child. Naming the child as the contingent owner of the policy will allow him or her to receive it on the death of the parent/grandparent.

UNDERSTAND THE PENSION INCOME TAX CREDIT

The pension income amount allows a taxpayer to claim a federal non-refundable tax credit on up to $2,000 of eligible pension income. The federal tax credit rate is 15%, so the maximum federal tax savings available is $300 ($2,000 x 15%). There are also provincial pension income amounts. By claiming them, clients receive the first $2,000 of pension income on a tax-free basis, but only if they’re in the lowest tax bracket. If they’re in a higher bracket they’ll pay tax on the pension income, but at a reduced rate. Income-splitting rules allow taxpayers to split up to 50% of eligible pension income with a spouse or common-law partner.

03 Transfer from trust to capital beneficiary. In this case, the trust owns the policy and rolls it over to the beneficiary, who assumes the trust’s ACB in the policy.

04 Corporately owned policies. Transfers are rolled over when a policy’s owned by a corporation that’s amalgamated or wound up. In an amalgamation, the new company is considered to be a continuation of the previous companies and the policy moves at ACB. In a windup, the parent company takes over the subsidiary’s assets and assumes the policy at the subsidiary’s ACB.

MORE EXCEPTIONS

There’s also an exception for non-arm’s length transfers of a life insurance policy, but with a special deeming rule.

When a policy’s transferred between non-arm’s length parties, the proceeds are deemed to be the cash surrender value (CSV), regardless of the amount the parties agreed to.

The deeming rule applies to the following transfers:

a. person donates policy to a charity;
b. shareholder transfers policy to his corporation;
c. corporation transfers policy to its shareholder; and
d. brother or sister transfers a policy to sibling.

It can help you by civilizing your sexual gift and other things you control to arrangement tonight in support of her!! Are you keen in support of them – all!! There are lots more to trade in expressions of order and burden abilities so if cheap cialis generic you wish to succeed. Most patients tadalafil online canada expect pain relief, better joint function and improved quality of life after the surgery. Today, thanks to modern medical developments, the treatment foea.org buy cialis of sexual dysfunction. An excessively high cholesterol, however is cialis tadalafil canada foea.org associated with atherosclerosis, which is a condition found in almost all ED patients. An example will help illustrate how the deeming rule applies in these scenarios. Assume the following for Policy XYZ:

Face amount

Cash surrender value

Adjusted cost basis

Fair market value

Scenario A : Tomasz donates Policy XYZ to his favorite charity. He receives a receipt for $500,000 (the policy’s fair market value) and a policy gain of $50,000 (cash surrender value in excess of ACB).

Scenario B : Mohammed transfers Policy XYZ to his private corporation for a cash payment equal to fair market value. He gets $500,000 and reports a policy gain of $50,000 as a taxable event. While this may seem an odd result, CRA has confirmed it in a technical interpretation. The company’s starting ACB will be the deemed proceeds of $200,000, the CSV (not the actual proceeds of $500,000).

Scenario C : A private corporation transfers Policy XYZ to its shareholder, Ellen, for no consideration. The corporation reports a policy gain of $50,000 and Ellen is deemed to have received a taxable benefit equal to $200,000. However, the Income Tax Act contains a shareholder benefit provision that taxes the shareholder based on the fair market value of a transaction. This means Ellen reports another taxable benefit equal to the excess of the policy’s fair market value over the amount already reported as a taxable benefit. That means Ellen’s starting ACB is the deemed proceeds ($200,000) plus any additional amount charged as a taxable benefit ($300,000), for a total of $500,000.

Scenario D: Peter transfers Policy XYZ to his sister, Paula, for $400,000. The transfer is deemed to occur at CSV. Peter reports a policy gain of $50,000, while Paula’s starting ACB is $200,000. Transfers between siblings are deemed to occur at CSV, irrespective of fair market value.

CRA’S POSITION ON FAIR MARKET VALUE

CRA has explained its position on how fair market value of a life insurance policy is determined in an information circular.

Factors CRA would typically consider in an assessment include the policy’s cash surrender value, loan value, face value, health of the insured, life expectancy, conversion privileges, term riders, double indemnity provisions and replacement value.

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Home > Finance > What Is An Assignee On A Life Insurance Policy?

What Is An Assignee On A Life Insurance Policy?

Published: October 14, 2023

Learn the role of an assignee on a life insurance policy and how it can impact your finances. Discover what it takes to become a finance-savvy assignee.

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more )

Introduction, definition of assignee, role of assignee in a life insurance policy, rights and responsibilities of an assignee, process of assigning a life insurance policy, benefits of assigning a life insurance policy, considerations before assigning a life insurance policy, potential challenges and risks for assignees.

Life insurance is a crucial financial tool that provides protection and financial security to individuals and their loved ones in case of unexpected events. While the primary purpose of life insurance is to provide a death benefit to beneficiaries, policy owners also have the flexibility to assign or transfer their policy rights to another person or entity. This is where an assignee comes into play.

An assignee on a life insurance policy refers to the individual or entity who is designated to receive the policy benefits or be the recipient of any policy changes. Assigning a life insurance policy can be a strategic move for policyholders who want to transfer ownership rights or allocate the proceeds to a specific person or organization.

In this article, we will delve deeper into the role of an assignee in a life insurance policy, their rights and responsibilities, as well as the process of assigning a policy. We will also explore the benefits and considerations involved in assigning a life insurance policy, along with potential challenges and risks that assignees may encounter.

Understanding the concept of assignees in life insurance policies is essential for policyholders who may be considering transferring their policy rights or for beneficiaries who need to comprehend the implications of an assigned policy. Without further ado, let’s dive into the details of assignees on a life insurance policy.

An assignee on a life insurance policy is an individual or entity that is designated to receive the policy benefits or take over the ownership rights and responsibilities. When a policyholder assigns their life insurance policy, they transfer their rights to the assignee, who then becomes the new owner of the policy.

The assignee can be a spouse, child, relative, friend, or even a business entity such as a trust or corporation. The assignee can be named at the time the policy is initially taken out, or the policyholder can choose to assign the policy at a later date. In some cases, a policyholder may assign their policy to a lender or creditor as collateral for a loan.

It is important to note that the assignee is distinct from the beneficiary. The beneficiary is the person or entity who receives the death benefit proceeds upon the death of the insured. While the assignee assumes ownership of the policy, they may or may not be the same person as the beneficiary.

Assigning a life insurance policy can be a way for policyholders to ensure that the intended recipient receives the policy benefits or to transfer the financial responsibility and management of the policy to someone else.

Now that we have established the definition of an assignee in a life insurance policy, let’s explore their role in more detail.

The assignee plays a significant role in a life insurance policy once they have been designated as the new owner. Their responsibilities and authority may vary depending on the terms of the policy and the specific agreement between the policyholder and the assignee. Here are some key roles an assignee may have:

Policy Ownership: As the assignee, they become the legal owner of the life insurance policy. This means they have the rights to manage and make decisions regarding the policy, subject to any limitations or conditions outlined in the assignment agreement.
Premium Payments: The assignee is generally responsible for paying the premiums to keep the policy in force. They may choose to use their own funds or utilize the policy’s cash value, if available, to cover the premiums.
Beneficiary Designation: The assignee may have the authority to change the beneficiary designation if permitted by the policy terms. This gives them the ability to redirect the policy’s death benefit to another individual or entity.
Policy Modifications: Depending on the specific agreement, the assignee may have the power to make changes to the policy, such as increasing or decreasing the coverage amount, adjusting the policy term, or adding additional riders.
Access to Policy Information: As the new policy owner, the assignee has the right to access and review the policy information, including the policy terms, conditions, and any associated documents.
Claims Processing: In the event of the insured’s death, the assignee is responsible for initiating the claims process and ensuring that the death benefit proceeds are disbursed to the designated beneficiary.

It’s important to note that the specific roles and authority of the assignee can vary based on the terms of the assignment agreement. It is essential for both the policyholder and the assignee to have a clear understanding of their respective roles and responsibilities to avoid any confusion or disputes in the future.

Now that we have examined the role of an assignee in a life insurance policy, let’s explore the rights and responsibilities they have in more detail.

When an individual or entity becomes the assignee of a life insurance policy, they acquire certain rights and responsibilities associated with the policy. These rights and responsibilities can vary depending on the terms of the assignment agreement and the specific provisions of the policy. Let’s take a closer look at the rights and responsibilities of an assignee:

Rights of an Assignee:

Ownership Rights: As the assignee, they have the right to the policy benefits and any cash value that has accumulated. They can make decisions regarding the policy, such as changing the beneficiary, modifying coverage, or accessing policy information.
Premium Payments: The assignee has the right to receive premium payments from the policyholder, which they can use to keep the policy in force. They may also have the right to access the policy’s cash value, if available.
Policy Modifications: Depending on the terms of the assignment agreement, the assignee may have the right to make changes to the policy, such as adjusting the coverage amount, policy term, or adding additional riders.
Access to Policy Information: The assignee has the right to access and review the policy information, including the terms, conditions, and any associated documents. This allows them to stay informed about the policy’s provisions and make informed decisions.
Claims Processing: In the event of the insured’s death, the assignee has the right to initiate the claims process and receive the death benefit proceeds. They are responsible for disbursing the proceeds to the designated beneficiary, if applicable.

Responsibilities of an Assignee:

Premium Payments: As the assignee, they are responsible for making premium payments to keep the policy in force. This ensures that the policy remains active and the coverage continues.
Policy Management: The assignee has the responsibility to manage and maintain the policy. This includes reviewing the policy regularly, staying informed about any changes in the terms and conditions, and making decisions that align with the policyholder’s intentions.
Beneficiary Designation: If authorized by the assignment agreement, the assignee may have the responsibility to change the beneficiary designation if necessary. This involves ensuring that the intended recipient of the death benefit is correctly designated.
Communication: The assignee has the responsibility to maintain open communication with the policyholder, beneficiaries, and any other parties involved. This helps in addressing any questions, concerns, or changes that may arise regarding the policy.

It’s important for both the assignee and the policyholder to have a clear understanding of these rights and responsibilities to ensure a smooth and effective management of the policy. Now that we have explored the rights and responsibilities of an assignee, let’s move on to understand the process of assigning a life insurance policy.

The process of assigning a life insurance policy involves transferring the ownership rights and control of the policy from the policyholder to the assignee. While the specific steps may vary based on the insurance company and policy terms, the general process typically includes the following:

Review Policy Terms: The policyholder should carefully review the terms and conditions of their life insurance policy to understand any limitations or restrictions on assigning the policy.
Choose an Assignee: The policyholder selects an individual or entity to be the assignee. This can be a family member, friend, trust, or even a business entity. It is essential to consider the long-term goals and intentions when choosing an assignee.
Obtain Consent: The policyholder must obtain the consent of the proposed assignee to ensure they are willing to assume the responsibilities and obligations associated with the policy.
Prepare Assignment Agreement: The policyholder and the assignee should work together to prepare an assignment agreement. This is a legal document that outlines the terms of the assignment, including the assignee’s rights, responsibilities, and any potential compensation or considerations involved.
Notify the Insurance Company: The policyholder must contact their insurance company to inform them of the intention to assign the policy. The insurance company may require specific forms to be filled out, along with a copy of the assignment agreement.
Insurance Company Approval: The insurance company will review the assignment request and the assignment agreement to ensure they comply with their policies and regulations. Once approved, they will update their records to reflect the new assignee.
Update Beneficiary Designation: If the assignee is different from the original beneficiary, the policyholder may need to update the beneficiary designation to ensure that the intended recipient receives the death benefit.

It is crucial for both the policyholder and the assignee to consult with legal and financial professionals to ensure that the assignment process is conducted properly, adhering to any legal requirements and optimizing the financial outcomes for all parties involved.

Now that we have discussed the process of assigning a life insurance policy, let’s move on to explore the benefits of assigning a life insurance policy.

Assigning a life insurance policy can offer several benefits for both the policyholder and the assignee. Here are some key advantages of assigning a life insurance policy:

Control and Flexibility: Assigning a life insurance policy allows the policyholder to have control over who will manage and benefit from the policy. It provides flexibility to designate a specific person or entity to take over the ownership rights and responsibilities.
Estate Planning: Assigning a life insurance policy can be an effective estate planning strategy. It allows the policyholder to transfer assets outside of their estate, which may help in minimizing estate taxes and ensuring a smooth transfer of wealth to the intended recipients.
Creditor Protection: By assigning a life insurance policy to a trust or business entity, the policy cash value and death benefit may be protected from potential creditors. This provides an added layer of financial security for the assignee and the intended beneficiaries.
Financial Assistance: Assigning a life insurance policy can be beneficial in scenarios where the assignee needs financial assistance. For example, if the assignee is facing financial hardship or requires funds for a specific purpose, they may be able to access the policy’s cash value or even borrow against the policy.
Charitable Giving: Assigning a life insurance policy to a charitable organization can be a meaningful way to support a favorite cause. It allows the policyholder to make a significant charitable contribution, and the assignee, in this case, would be responsible for managing the policy and ensuring that the proceeds benefit the designated charity.

It’s important to note that the benefits of assigning a life insurance policy can vary depending on the specific circumstances and goals of the policyholder. Therefore, it is advisable to consult with financial advisors, estate planning professionals, and insurance experts to assess the suitability of assigning a policy and to maximize the potential benefits.

Now that we have explored the benefits of assigning a life insurance policy, let’s move on to discuss some considerations before making the decision to assign a policy.

Before deciding to assign a life insurance policy, it is crucial to carefully consider a few key factors. These considerations will help ensure that the decision aligns with your financial goals and meets your specific needs. Here are some important points to ponder:

Impact on Beneficiaries: Assigning a life insurance policy may have implications for the intended beneficiaries. It is essential to consider their needs and financial security before assigning the policy to someone else or an entity. Make sure to have open conversations with the beneficiaries to discuss any changes in the policy ownership and how it may impact them.
Future Financial Needs: Assess your own future financial needs before assigning a life insurance policy. Life circumstances can change, and it is crucial to determine if the policy’s cash value or death benefit might be required for your own financial stability or long-term goals. Balancing immediate financial needs with the desire to assign the policy is important.
Trustworthiness of the Assignee: Consider the trustworthiness and reliability of the proposed assignee. Assigning a life insurance policy involves transferring ownership rights and responsibilities, so it is crucial to choose someone who will effectively manage the policy and fulfill the agreed-upon obligations. Conduct thorough due diligence and consider seeking legal advice to ensure the assignee is the right choice.
Tax Implications: Assigning a life insurance policy may have tax implications. Consult with tax professionals to understand any potential tax consequences of the assignment, such as gift tax or estate tax considerations. Proper planning and knowledge of tax laws will help mitigate any unexpected tax liabilities.
Insurance Company Policy: Review the terms and conditions of your life insurance policy regarding assignments. Some policies may have restrictions or limitations on assigning a policy, and it’s important to understand these provisions. Contact your insurance company directly to clarify any concerns or questions related to the assignment process.
Legal Considerations: Assigning a life insurance policy involves legal documentation and agreements. It is advisable to consult with legal professionals who specialize in insurance and estate planning to ensure that the assignment is conducted in compliance with applicable laws and meets your specific needs.

Considering these factors will help you make an informed decision about whether assigning a life insurance policy is the right choice for you. Assess your individual situation, speak with professionals, and review your long-term goals to determine if assigning the policy aligns with your overall financial plan.

Now that we have explored the considerations before assigning a life insurance policy, let’s discuss some potential challenges and risks for assignees.

While assigning a life insurance policy can have its benefits, there are also potential challenges and risks that assignees should be aware of. Understanding these risks will help you make informed decisions and take necessary precautions. Here are some potential challenges and risks for assignees:

Financial Responsibility: As the assignee, you become responsible for paying the policy premiums to keep the coverage in force. Failure to pay the premiums can result in the policy lapsing, causing loss of coverage and potential loss of the policy’s cash value.
Potential Conflict: Assigning a life insurance policy may lead to conflicts, especially if the policyholder has multiple beneficiaries or if the assigned policy conflicts with other estate planning arrangements. It is important to communicate and coordinate with all involved parties to minimize potential disputes.
Changing Circumstances: Life circumstances can change, and the assigned policy may no longer align with the assignee’s needs or financial goals. Review the policy periodically to ensure it still meets your objectives. If necessary, consult with professionals to explore options for policy modifications or changes.
Loss of Control: By assigning a policy, you relinquish control over certain aspects of the policy. The assignee may need to consult the policyholder or beneficiaries before making any changes or important decisions. This loss of control should be carefully considered before proceeding with the assignment.
Insurance Company Approval: The insurance company typically has the final say in approving the assignment. They will review and confirm the assignment agreement to ensure compliance with their policies. If the assignment is not approved, it can impede the intended transfer of ownership.
Tax Implications: Assigning a life insurance policy may have tax consequences for the assignee, such as potential income tax on the policy’s cash value or estate tax implications. Consult with tax professionals before finalizing the assignment to fully understand these potential tax implications.

It is crucial for assignees to carefully weigh these challenges and risks against the potential benefits before accepting the assignment of a life insurance policy. Be proactive in communicating with the policyholder and beneficiaries, stay informed about policy details, and seek professional guidance to navigate any potential challenges or risks.

Now that we have discussed the potential challenges and risks for assignees, let’s wrap up our article.

Assigning a life insurance policy can be a strategic financial move that offers flexibility and control over the policy’s ownership and benefits. By designating an assignee, individuals can ensure that the policy proceeds are directed to the intended recipient or utilize the expertise of an entity to manage the policy. However, before proceeding with an assignment, it is important to carefully consider various factors.

Understanding the role, rights, and responsibilities of an assignee is vital to ensure a smooth transition and effective management of the policy. The assignee assumes ownership of the policy, enjoying benefits such as decision-making authority and control over premiums. They also have responsibilities, including making premium payments, managing the policy, and initiating claims if the insured passes away.

The process of assigning a life insurance policy involves reviewing policy terms, choosing an assignee, obtaining consent, preparing an assignment agreement, and notifying the insurance company. It is crucial to review the policy specifics and consult legal and financial professionals to ensure compliance with regulations and optimize financial outcomes.

Assigning a life insurance policy offers numerous benefits, such as control, estate planning opportunities, creditor protection, and financial assistance. However, there are considerations to keep in mind, including the impact on beneficiaries, future financial needs, and tax implications.

Assignees may face potential challenges, such as financial responsibility, conflicts of interest, changing circumstances, loss of control, and insurance company approval. These risks should be carefully assessed, and open communication with the policyholder and beneficiaries is essential to minimize disputes and ensure a smooth transition.

In conclusion, assigning a life insurance policy requires thoughtful deliberation and consultation with professionals. Assessing your financial goals, considering the needs of beneficiaries, and understanding the potential risks will help make an informed decision. Assigning a life insurance policy can provide peace of mind, but careful consideration and planning are essential to ensure the assigned policy aligns with your long-term financial goals.

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Home » Articles Library » 2 Ways to Transfer Ownership of a Life Insurance Policy

2 Ways to Transfer Ownership of a Life Insurance Policy

Things to Know about Borrowing Against Your Life Insurance Policy

As property, policyowners can transfer their life insurance contracts to other persons or entities. A policyowner can transfer either all or only some of the “bundle of rights” that comprises a life insurance policy to almost any person or entity.

The two basic ways of making a lifetime transfer of a policy are: (1) the absolute assignment; and (2) the collateral assignment. An absolute assignment, as its name implies, transfers all the policyowner’s rights irrevocably. A collateral assignment, again as its name implies, assigns so much of the death benefit as necessary for as long as necessary to secure a lender’s rights. But no more of the proceeds will go to the lender than the amount of debt owed.

Requirements

The assignment does not have to be of any particular form (absent specific provisions in state law or the contract to the contrary). Because life insurance is treated as personal property, policyowner may transfer ownership rights, not only by many different types of documents, but also by many different actions. For example, if a person sells a business and the business owns a life insurance policy, the sale of all the assets of the business carries with it the personal property the business owned – including the life insurance.

Likewise, a property settlement in connection with a divorce may have the effect of transferring the ownership of life insurance on the life of one or the other (or both) spouse(s) even though no one ever uses the word “assignment” with regard to these transfers. But this type of transfer (where a clause in the divorce decree disposes of life insurance) is both very dangerous and very awkward. If a policyowner names his new spouse as beneficiary of the insurance proceeds and the insurer has no notice or knowledge of the divorce decree’s change, both spouses are likely to claim the proceeds. Furthermore, if the decree requires the policyowner spouse to maintain the policy for the benefit of his or her ex-spouse, the policyowner cannot obtain a policy loan-even to keep the policy in force through a premium loan.

Before either the absolute or collateral type of assignment or any other instance of a policy ownership transfer is valid, the policyowner must notify the insurer (and, where required by the terms of the contract, the insurer must consent to the assignment). Once notified in writing at the insurer’s home office, the insurer must honor the policyowner’s transfer—unless the terms of the contract itself forbid assignments. So if the insurer then disregards (by intention or neglect) the assignee’s rights and makes payment to someone else, the courts may force the insurer to make a second payment to the assignee. If the policyowner gives no notice to the insurer, it will be protected in a transaction initiated by a former owner. For instance, if the former owner applies for a policy loan and he has not given the insurer proper notice that he had assigned the policy, the insurer is protected in making that loan.

The insurer does not, however, have to verify the bona fides of the transaction between the policyowner and the transferee nor the validity of the transaction. In other words, the insurer is not accountable for the mental or legal capacity of the policyowner to make the assignment (unless it had knowledge that the policyowner was not legally competent to make it or there were irregularities in the assignment form).

Absolute Assignments

Policyowners use an absolute assignment in life insurance planning when the policyowner wants to sell or give away all of his or her rights under the contract. The goal might be to obtain valuable consideration, to save estate taxes, avoid creditors, or purely for love and affection and to assure the transferee of financial security. There are many common examples of sales and gifts:

A client might sell a policy on his life to his business.
A business might sell a policy on an employee’s life to the employee or to the employee’s spouse or child or trust (or to a pension plan).
A shareholder might sell a policy on his life to a new business associate.
A client might give a policy on her life to her spouse.
A client might give a policy on his life to his children or to a family trust.

Tax Implications

Both sales and gift transactions have important and sometimes unexpectedly expensive tax implications. Planners should thoroughly research before allowing any sale of a life insurance policy. Also, understand what should be considered before allowing a client to make a gift of a policy. A valid gift requires that the donor have contractual capacity and intent to make a voluntary gratuitous transfer and the gift must be delivered to and accepted by the donee (assignee).

Nontax Implications

Planners must be aware of the nontax implications of an absolute assignment in order to avoid them and/or alert the client to their potential effect. Some of these are:

Although an absolute assignment itself may not per se change the interest of a revocable beneficiary, as a practical matter the new owner can immediately change the beneficiary and often makes that change almost simultaneously with the assignment. Some absolute assignment forms state that the new owner is automatically the primary policy beneficiary until the new owner makes a change to the beneficiary designation.

If the policyowner made an irrevocable beneficiary designation before making an absolute assignment of the policy, in most states the assignment will not defeat that designation (without the written consent of the beneficiary) and the transferee should be apprised of this fact.

Absolute assignments may put the policy and its proceeds beyond the claims of the policyowner’s creditors, but planners should inform policyowner that—like diamonds—an absolute assignment is forever. There is a loss of both control and flexibility from the transferor’s viewpoint.

Credits & Deductions

INFORMATION FOR...
Businesses & Self-Employed
Earned Income Credit (EITC)
Child Tax Credit
Clean Energy and Vehicle Credits
Standard Deduction
Retirement Plans

Forms & Instructions

POPULAR FORMS & INSTRUCTIONS
Form 1040 Instructions
Form 4506-T
POPULAR FOR TAX PROS
Form 1040-X
Circular 230

Are the life insurance proceeds I received taxable?

Information you'll need

if the amount you received is more than the cost of the policy
the face amount of the policy, if specified in the policy
if you are receiving the proceeds in installments, whether there is a refund or period-certain guarantee
If federal income tax was withheld from the life insurance proceeds

The tool is designed for taxpayers who were U.S. citizens or resident aliens for the entire tax year for which they're inquiring. If married, the spouse must also have been a U.S. citizen or resident alien for the entire tax year. For information about nonresidents or dual-status aliens, please see International taxpayers .

Conclusions are based on information provided by you in response to the questions you answered. Answers do not constitute written advice in response to a specific written request of the taxpayer within the meaning of section 6404(f) of the Internal Revenue Code.

Estimated completion time: 7 minutes

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Tax Law Implications of Life Insurance

Federal estate tax applies only to estates of people who are very wealthy. The threshold limit is in the millions of dollars, and it is over $10 million for couples. You should find out whether you are likely to owe federal estate tax before devising an estate planning strategy and deciding how to handle life insurance proceeds. If your estate will owe federal estate tax, life insurance proceeds will be included in the taxable estate if you own the policy. They will not be included in the taxable estate if you do not own the policy. Moreover, they will not be subject to tax if your spouse is the sole beneficiary of the policy.

If you own a life insurance policy that has a beneficiary other than your spouse, and federal estate tax will apply to your estate, you may be able to avoid tax on the proceeds by transferring the ownership of your policy to another adult, such as the named beneficiary of the policy. Alternatively, you may be able to transfer the ownership of the policy to an irrevocable life insurance trust. You should review the terms of your policy to make sure that it permits a transfer of ownership. A group policy through your employer may not include this feature.

Federal estate taxes only apply to estates over a certain value ($12.06 million for individuals or $24.12 million for married couples in 2022).

Transferring Ownership to a Person

This involves a certain amount of risk because you cannot undo the transfer. For example, if you transfer ownership to a child from whom you later become estranged, you cannot regain control of the policy or cancel it. If you have a strong, stable relationship with an adult child or another loved one, however, this may be a smart way to reduce the tax burden on your estate. You must make sure to transfer the policy as soon as possible, since the IRS has established that a gift must be made more than three years before the original owner’s death. (Some state estate tax systems apply this rule as well.)

Also, a more complex IRS rule negates a policy transfer when the original owner retains significant control (“incidents of ownership”) over the policy. If they still have the right to change or add beneficiaries, borrow against the policy, choose payment options for beneficiaries, surrender or cancel the policy, or convert the policy, they will be considered the effective owner notwithstanding the transfer. Federal estate tax still will apply.

You may want to be aware that your estate will need to pay gift tax if you transfer a policy to its beneficiary, and it reaches a certain threshold value. The amount of gift tax will be significantly lower than the amount of federal estate tax that would have been due, though, and it will not need to be paid until the original owner’s death.

Assignments of Ownership

You will need to complete an assignment of ownership to transfer the ownership of a policy. The insurance company can provide this form. You also will need to change the policy to state that the owner is someone other than the insured. The new owner will need to start making premium payments to prevent the rule regarding incidents of ownership from applying. However, the initial owner can give the new owner money to pay premiums if needed. If you have a single-premium policy, no further premiums will need to be paid. This can make the process of transferring the policy simpler, although sometimes a greater amount of gift tax will need to be paid.

Transferring Ownership to a Life Insurance Trust

If you still want to keep control over a policy and avoid the risks of transferring ownership to another person, you can create an irrevocable life insurance trust and place the policy in it. You technically will not be the owner of the policy. The terms of the trust may provide that the policy will remain effective for as long as you live.

The owner of a policy must meet certain requirements to prevent federal estate tax from applying to the proceeds. They must make sure that the trust is irrevocable, or otherwise they still will be considered the owner. Also, they must name someone else as the trustee, and they must establish the trust at least three years before their death. You may want to consult an estate planning attorney who is skilled in tax issues to better understand which method of transferring ownership works for you.

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Last reviewed October 2023

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Life Insurance Benefits
Avoiding Life Insurance Taxes
Regulations on Life Insurance
Life Insurance FAQs

The Bottom Line

Life Insurance

Do Beneficiaries Pay Taxes on Life Insurance?

Learn how interest and estate planning affect your distribution

assignment of life insurance policy tax consequences

When the beneficiary of a life insurance policy receives a death benefit, this money is not counted as taxable gross income. However, situations do exist where the beneficiary is taxed on some or all of a policy's proceeds.

If the policyholder elects to delay the benefit payout and the money is held by the life insurance company for a given period of time, the beneficiary may have to pay taxes on the interest generated during that period. When a death benefit is paid to an estate, the person or persons inheriting the estate may have to pay estate taxes.

Key Takeaways

In a typical situation, inherited money from a life insurance policy beneficiary is not taxed as income.
In some cases, a beneficiary may have to pay tax on any interest the policy accrued.
If the policyholder named an estate rather than an individual, as a beneficiary, the person or people inheriting the estate might have to pay estate taxes.
Beneficiaries must be listed on a life insurance policy.
To avoid paying any taxes on life insurance proceeds, a taxpayer will need to transfer ownership of the policy to another person or entity.

When Is a Life Insurance Benefit Taxable?

Interest income.

Income earned in the form of interest is almost always taxable at some point. Life insurance is no exception. This means when a beneficiary receives life insurance proceeds after a period of interest accumulation rather than immediately upon the policyholder's death, the beneficiary must pay taxes, not on the entire benefit, but on the interest.

For example, if the death benefit is $500,000, but it earns 10% interest for one year before being paid out, the beneficiary will owe taxes on the $50,000 growth.

According to the IRS, if the life insurance policy was transferred to you for cash or other assets, the amount that you exclude as gross income when you file taxes is limited to the sum of the consideration you paid, any additional premiums you paid, and certain other amounts—in other words, you can't overpay for a policy as a way to cut your taxable income .

Estate and Inheritance Taxes

One poor decision that investors seem to frequently make is to name "payable to my estate" as the beneficiary of a contractual agreement, such as an individual retirement account (IRA), an annuity, or a life insurance policy.

However, when you name the estate as your beneficiary, you take away the contractual advantage of naming a real person and subject the financial product to the probate process. Leaving items to your estate also increases the estate's value, and it could subject your heirs to exceptionally high estate taxes.

Section 2042 of the Internal Revenue Code states that the value of life insurance proceeds insuring your life is included in your gross estate if the proceeds are payable:

To your estate, either directly or indirectly
To named beneficiaries, if you possessed any " incidents of ownership " in the policy at the time of your death

Investopedia / Joules Garcia

Tips to Avoid a Life Insurance Benefit Tax

Using an ownership transfer to avoid taxation.

Federal taxes won't be due on many estates. The basic exclusion amount for an estate for a decedent that passed away in 2022 is $12.06 million, and the exclusion amount for 2023 is $12.92 million. The top tier tax rate is capped at 40%.

Many of the changes enacted by the Tax Cuts and Jobs Act, including the higher federal estate tax exclusion, are currently set to expire at the end of 2025 unless Congress extends them.

For those estates that will owe taxes, whether life insurance proceeds are included as part of the taxable estate depends on the ownership of the policy at the time of the insured's death. If you want your life insurance proceeds to avoid federal taxation, you'll need to transfer ownership of your policy to another person or entity.

Here are a few guidelines to remember when considering an ownership transfer:

Choose a competent adult/entity to be the new owner (it may be the policy beneficiary), then call your insurance company for the proper assignment , or transfer of ownership, forms.
New owners must pay the premiums on the policy. However, you can gift up to $16,000 per person in 2022 and $17,000 in 2023, so the recipient could use some of this gift to pay premiums.
You will give up all rights to make changes to this policy in the future. However, if a child, family member, or friend is named the new owner, changes can be made by the new owner at your request.
Because ownership transfer is an irrevocable event, beware of divorce situations when planning to name the new owner.
Obtain written confirmation from your insurance company as proof of the ownership change.

If three different individuals are listed as the insured, policy owner, and the beneficiary, then gift tax may occur, because in most cases, the insured and the policy owner are one and the same. However, if the insured is a different person than the policy owner, the IRS will conclude that the death benefit amount from the policy owner to the beneficiary, and you may have to pay gift tax on the amount.

Once you are deceased, the gift tax comes due, but the beneficiary of the death benefit won't have to pay it unless it is more than $12.92 million (in 2023), and that includes any gifts made of more than $17,000 a year (in 2023).

If you die within three years of a transfer of ownership, the full amount of the proceeds is included in your estate as though you still owned the policy.

Using Life Insurance Trusts to Avoid Taxation

A second way to remove life insurance proceeds from your taxable estate is to create an irrevocable life insurance trust (ILIT) . To complete an ownership transfer, you cannot be the trustee of the trust, and you may not retain any rights to revoke the trust. In this case, the policy is held in trust, and you will no longer be considered the owner. Therefore, the proceeds are not included as part of your estate.

Why choose trust ownership rather than transferring ownership to another person? One reason might be that you still wish to maintain some legal control over the policy. Or perhaps you are afraid that an individual owner may fail to pay premiums, whereas in the trust, you can ensure that all premiums are paid promptly. If the beneficiaries of the proceeds are minor children from a previous marriage, an ILIT will allow you to name a trusted family member as trustee to handle the money for the children under the terms of the trust document.

Regulations on Life Insurance Policy Ownership

The IRS has developed rules that help determine who owns a life insurance policy when an insured person dies. The primary regulation overseeing proper ownership is known in the financial world as the three-year rule , which states that any gifts of life insurance policies made within three years of death are still subject to federal estate tax. This applies to both a transfer of ownership to another individual and the establishment of an ILIT.

The IRS will also look for any incidents of ownership by the person who transfers the policy. In transferring the policy, the original owner must forfeit any legal rights to change beneficiaries, borrow against the policy, surrender, cancel the policy, or select beneficiary payment options.

Furthermore, the original owner must not pay the premiums to keep the policy in force. These actions are considered part of the ownership of the assets, and if any of them are carried out, they can negate the tax advantage of transferring them.

However, even if a policy transfer meets all of the requirements, some of the transferred assets may still be subject to taxation. If the policy's current cash value exceeds the gift tax exclusion of $16,000 in 2022 and $17,000 in 2023, gift taxes will be assessed and due at the time of the original policyholder's death.

Do You Have to Pay Taxes on Money Received as a Beneficiary?

You do not normally have to pay taxes on life insurance money received as a beneficiary.

Do You Pay Taxes on Inherited Life Insurance Money?

No. You do not have to pay taxes on inherited life insurance money, unless the life insurance benefit accrued interest. If that happens, you may have to pay taxes on the interest.

How Do I Avoid Taxes on Life Insurance Proceeds?

Life insurance proceeds are not normally subject to estate or income tax. Associated taxes related to interest earned during the collection process can be minimized by ensuring the proper documentation and reporting requirements are met in a timely manner.

Do I Need to Report Inheritance to the IRS?

Most inheritance does not need to be reported to the IRS. Subsequent earnings on the inherited assets may be taxable, though.

It's not uncommon for individuals to be insured under a life insurance policy for $500,000 to several million in death benefits. Once you add in the value of your home, your retirement accounts, savings, and other belongings, you may be surprised by the size of your estate. If you factor in more years of growth, some individuals may be facing an estate tax issue.

A viable solution to this is to maximize your gifting potential and to transfer policy ownership whenever possible at little or no gift-tax cost. As long as you live another three years after the transfer, your estate could save a significant amount of tax.

Internal Revenue Service. " Life Insurance & Disability Insurance Proceeds ."

Internal Revenue Service. " Frequently Asked Questions on Estate Taxes ."

U.S. Government Publishing Office. " Title 26—Internal Revenue Code, § 2042 ."

Internal Revenue Service. “ What's New - Estate and Gift Tax .”

U.S. Congress. " An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 ."

Internal Revenue Service. " IRS Provides Tax Inflation Adjustments for Tax Year 2023 ."

U.S. Government Publishing Office. " Title 26—Internal Revenue Code, § 2035. Adjustments for Certain Gifts Made Within 3 Years of Decedent’s Death ."

Legal Information Institute. " Irrevocable Life Insurance Trust ."

Internal Revenue Service. " Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return ," Pages 27.

Internal Revenue Service. " Frequently Asked Questions on Gift Taxes, How Many Annual Exclusions are Available? "

Internal Revenue Service. " Gifts & Inheritances ."

How to Get Life Insurance 1 of 41
Life Insurance: What It Is, How It Works, and How To Buy a Policy 2 of 41
When Should You Get Life Insurance? 3 of 41
How Age Affects Life Insurance Rates 4 of 41
Is Life Insurance Worth It? 5 of 41
What to Expect When Applying for Life Insurance 6 of 41
Universal Life Insurance vs. Whole Life 7 of 41
11 Best Term, Whole, and No-Exam Life Insurance Companies for April 2024 8 of 41
Term Life Insurance: What It Is, Different Types, Pros and Cons 9 of 41
What Is Term Insurance? How Does It Work, and What Are the Types? 10 of 41
Group Term Life Insurance: What It Is, How It Works, Pros & Cons 11 of 41
Best Term Life Insurance Companies of April 2024 12 of 41
Permanent Life Insurance: Definition, Types, and Difference from Term Life 13 of 41
What Is Cash Value in Life Insurance? Explanation With Example 14 of 41
Whole Life Insurance Definition: How It Works, With Examples 15 of 41
Best Whole Life Insurance Companies of April 2024 16 of 41
What Is Universal Life (UL) Insurance? 17 of 41
Variable Universal Life (VUL) Insurance: What It Is, How It Works 18 of 41
What Is Indexed Universal Life Insurance (IUL)? 19 of 41
Paid-Up Additional Insurance: Definition and the Role of Dividends 20 of 41
Adjustable Life Insurance: Definition, Pros & Cons, vs. Universal 21 of 41
Guaranteed Issue Life Insurance: What it is, How it Works, 22 of 41
Final Expense Insurance: What it is, Who Needs it, Pros and Cons 23 of 41
Burial Insurance: What It is, How It Works 24 of 41
8 Common Life Insurance Riders 25 of 41
Accelerated Benefit Riders: How They Work 26 of 41
Dread Disease Rider: What it is, How it Works 27 of 41
Family Income Rider: What It Is, How It Works 28 of 41
Are Return of Premium Riders Worth It? 29 of 41
Waiver of Premium Rider: Definition, Purpose, Benefits, and Cost 30 of 41
Long-Term Care Rider: What it is, How it Works 31 of 41
How Can I Borrow Money From My Life Insurance Policy? 32 of 41
Cashing in Your Life Insurance Policy 33 of 41
What Is Cash Surrender Value? How It Compares to Cash Value 34 of 41
Cash Value vs. Surrender Value: What's the Difference? 35 of 41
IRA vs. Life Insurance for Retirement Saving: What's the Difference? 36 of 41
How Does Life Insurance Work? 37 of 41
Understanding Taxes on Life Insurance Premiums 38 of 41
What Are the Tax Implications of a Life Insurance Policy Loan? 39 of 41
What Is a 1035 Exchange? Definition and How the Rules Work 40 of 41
Do Beneficiaries Pay Taxes on Life Insurance? 41 of 41

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GROSS INCOME

Income from Sales or Settlements of Life Insurance Contracts

Individual Income Taxation

Editor: Stephen E. Aponte, CPA

Life insurance contracts have a plethora of tax complexities with varying tax implications. In Rev. Rul. 2009-13, the IRS has provided guidance on the amount and character of income that taxpayers recognize in the surrender or sale of life insurance contracts. In Rev. Rul. 2009- 14, the IRS has provided guidance to purchasers of life insurance contracts for profit. Life insurance contracts have long been in existence, but the Code did not define them for tax purposes until Sec. 7702 was added in 1984 by the Deficit Reduction Act of 1984, P.L. 98-369, effective for co ntracts issued after December 31, 1984, in tax years ending after December 31, 1984.

Life insurance contracts have a plethora of tax complexities with varying tax implications. In Rev. Rul. 2009-13, the IRS has provided guidance on the amount and character of income that taxpayers recognize in the surrender or sale of life insurance contracts. In Rev. Rul. 2009-14, the IRS has provided guidance to purchasers of life insurance contracts for profit. Life insurance contracts have long been in existence, but the Code did not define them for tax purposes until Sec. 7702 was added in 1984 by the Deficit Reduction Act of 1984, P.L. 98-369, effective for co ntracts issued after December 31, 1984, in tax years ending after December 31, 1984.

Life Insurance Contract Defined

The term “life insurance contract” as defined in Sec. 7702 means any contract that is a life insurance contract under the applicable law, but only if the contract:

Meets the cash value accumulation test of Sec. 7702(b); or
Meets the guideline premium requirements of Sec. 7702(c) and falls within the cash value corridor of Sec. 7702(d).

Cash value accumulation test: A contract meets the cash value accumulation test if, by the terms of the contract, the cash surrender value of the contract may not at any time exceed the net single premium that would have to be paid at that time to fund future benefits under the contract.

Guideline premium requirements: A contract meets the guideline premium requirements if the sum of the premiums paid under the contract does not at any time exceed the guideline premium limitation as of that time.

Cash value corridor: A contract falls within the cash value corridor if the death benefit under the contract at any time is not less than the applicable percentage of the cash surrender value. Additional information regarding the cash valuation accumulation test, guideline premium requirements, and the cash value corridor can be found in Sec. 7702 and its regulations.

Taxation If Contract Meets Definition and Insured Dies

If the contract meets the life insurance contract definition, Sec. 101(a) provides that amounts received are generally excluded from gross income if paid by reason of the death of the insured. The exclusion under Sec. 101(a) applies regardless of whether the payment is made to the estate of the insured or to an individua l, corporation, partnership, or other beneficiary and whether it is made directly or in trust.

Taxation If Contract Does Not Meet Definition

If a contract does not meet the life insurance contract definition, in general the income on the contract for any tax year of the policyholder shall be treated as ordinary income received or accrued by the policyholder during that year (Sec. 7702(g)(1)). The term “income on the contract” means, with respect to any tax year of the policyholder, the excess of:

The sum of the increase in the net surrender value of the contract during the tax year and the cost of life insurance protection provided under the contract during the tax year, over
The premiums paid under the contract during the tax year.

Life Insurance Contracts Sold and Purchased in the Secondary Market

Life insurance contracts purchased by the insured are not always held until death. The IRS issued guidance in Rev. Rul. 2009- 13 on the amount and character of income to be recognized involving the surrender or sale of a life insurance contract that meets the definitional requirements of Sec. 7702. The guidance is provided through three different factual situations.

Situation 1—Surrender for cash surrender value: A, an individual, entered into a life insurance contract with cash value. Under the contract, A was the insured, and the named beneficiary was a member of A’s family. A had the right to change the beneficiary, take out a policy loan, or surrender the contract for its cash surrender value. The contract in A’s hands was not property described in Sec s. 1221(a)(1)–(8) (i.e., it was a capital asset).

A surrenders the contract for its $78,000 cash surrender value, which reflects the subtraction of $10,000 of “cost of insurance” charges collected by the issuer for periods ending on or before the surrender date. Through that date, A had paid $64,000 in premiums under the life insurance contract. A never received any distributions under the contract and never borrowed against the contract’s cash surrender value.

In general, under Sec . 72(e)(2), a nonannuity amount that is received on or after the annuity starting date is included in gross income, but only to the extent it exceeds investment in the contract. Sec. 72(e) does not specify whether income recognized on the surrender of a life insurance contract is treated as ordinary income or as capital gain. The life insurance contract is capital asset property. However, Rev. Rul. 64-51 explicitly states that the proceeds received from the surrender of, or at the maturity of, a life insurance contract are ordinary income to the extent that they exceed the cost of the policy. Accordingly, the $14,000 of income recognized by A on the surrender of the life insurance contract is ordinary income.

Situation 2—Sale of cash value life insurance contract: The facts are the same as in situation 1, except that A sells the life insurance contract for $80,000 to B, a person unrelated to A who would suffer no economic loss upon A’s death.

Unlike situation 1, which involves the surrender of the life insurance contract to the issuer of the contract, situation 2 involves an actual sale of the contract. Nevertheless, some or all of the gain on the sale of the contract may be ordinary if the substitute for ordinary income doctrine applies.

The Supreme Court has held, under the substitute for ordinary income doctrine, that cla ims or rights to ordinary income are not capital assets ( United States v. Midland-Ross Corp ., 381 U.S. 54 (1965)). Claims or rights to ordinary income include lump-sum payments attributable to income from or accretions to the value of capital assets that otherwise would have been ordinary income when recognized in the future by the taxpayer ( Prebola , 482 F.3d 610 (2d Cir. 2007)). Thus, ordinary income that has been earned but not recognized by a taxpayer cannot be converted into capital gain by a sale or exchange.

The inside buildup under A’s life insurance contract immediately prior to the sale to B was $14,000 ($78,000 cash surrender value less $64,000 aggregate premiums paid). If B had surrendered the life insurance contract or held it to maturity, this inside buildup would have been taxed as ordinary income per Rev. Rul. 64-51. Hence, $14,000 of the $26,000 of income that A must recognize on the sale of the contract is ordinary income under the substitute for ordinary income doctrine. The remaining $12,000 of income is longterm capital gain within the meaning of Sec . 1222(3).

Situation 3—Sale of term (no cash value) life insurance contract: The facts are the same as in situation 1, except that the contract was a level premium 15-year term life insurance contract without cash surrender value. A paid premiums totaling $45,000 and then sold the life insurance contract for $20,000 to B, a person unrelated to A who would suffer no economic loss upon A’s death.

A’s adjusted basis in the life insurance contract for purposes of determining gain or loss on the sale equals the total premiums paid under the contract less charges for the provision of insurance before the sale. Absent other proof, the cost of the insurance provided to A each month is presumed to equal the monthly premium under the contract (in this case, $500). The cost of the insurance protection provided to A during the 89½ months that A held the contract was $500 × 89½ months, or $44,750. Hence, A’s adjusted basis in the contract on the date of the sale to B was $250 ($45,000 total premiums paid less $44,750 cost of insurance protection).

The life insurance contract was a capital asset under Sec. 1221(a), and B held it for more than one year. The term life insurance contract had no cash surrender value. Hence, there was no inside buildup under the contract to which the substitute for ordinary income doctrine could apply. Therefore, the $19,750 of inc ome that A must recognize on the sale of the contract is long-term capital gain within the meaning of Sec. 12 22(3).

Effective date: Rev. Ru l. 2009-13 is effective immediately, but the holdings with respect to situations 2 and 3 will not be applied adversely to sales occurring before August 26, 2009.

Purchases of Life Insurance Contracts at Profit

Rev. Rul. 2009-14 provides guidance on the amount and character of income to be recognized by purchasers of life insurance contracts at profit from a U.S. citizen. Consistent with Rev. Rul. 2009- 13, the guidance pertains to life insurance contracts that meet the definitional requirements of Sec. 7702. Three different factual situations are presented.

Situation 1—Payment of death benefit: A and B are U.S. citizens residing in the United States. B purchases from A for $20,000 a life insurance contract on A’s life. The contract was a level premium 15- year term life insurance contract without cash surrender value. As owner of the contract, B has the right to change the beneficiary and, pursuant to that right, names himself beneficiary under the contract immediately after acquiring the contract.

B had no insurable interest in A’s life (except for the purchase of the contract), had no relationship to A, and would suffer no economic loss upon A’s death. B purchased the contract with a view to profit. The contract in B’s hands was not capital asset property described in Secs. 1 221(a)(1)–(8). The likelihood that B would allow the contract to lapse by failing to pay any of the remaining premiums was remote.

On December 31, 2009, A died, and IC, the domestic corporation insurer, paid $100,000 under the life insurance contract to B by reason of A’s death. Through that date, B had paid monthly premiums totaling $9,000 to keep the contract in force.

While generally gross income does not include amounts received under a life insurance contract if such amounts are paid by reason of the death of the insured, in the case of a transfer for valuable consideration, Sec. 10 1(a)(2) provides that the amount excluded from gross income shall not exceed an amount equal to the sum of the actual value of the consideration paid and the premiums and other amounts subsequently paid by the transferee. This “transfer for value” rule does not apply in the case of a tr ansfer involving a carryover basis or in the case of a transfer to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or an officer.

B received $100,000 from IC by reason of the death of A, the insured under the contract. Because B purchased the contract from A in exchange for a purchase price of $20,000, B’s acquisition of the contract was a “transfer for a valuable consideration” within the meaning of Sec. 10 1(a)(2). Neither the carryover basis exception of Sec. 10 1(a)(2)(A) nor the exception for transfers involving parties related to the insured under Sec. 10 1(a) (2)(B) applied. Accordingly, Sec. 10 1(a) (1) excludes from B’s gross income the amount received by reason of A’s death, but Sec. 10 1(a)(2) limits the exclusion to the sum of the actual value of the consideration paid for the transfer ($20,000) and other amounts paid by B ($9,000), or $29,000. B therefore must include in gross income $71,000, which is the difference between the total death benefit received ($100,000) and the amount excluded under Sec. 10 1 ($29,000).

The life insurance contract was property held by B not described in Secs. 1221(a)(1)–(8), so it is a capital asset. However, neither the surrender of a life insurance or annuity contract nor the receipt of a death benefit from the issuer under the terms of the contract produces a capital gain. Therefore, the $71,000 income B recognized upon the receipt of death benefits under the contract is ordinary income.

Situation 2—Investor sells policy: The facts are the same as in situation 1, except that A does not die and on December 31, 2009, B sells the contract to C (a person unrelated to A or B) for $30,000.

Under Sec. 1001(b), B’s amount realized from the s ale of the life insurance contract is the sum of money received from the sale, or $30,000. Regs. Sec. 1.263(a)-4(c)(1)(iv) requires taxpayers to capitalize an amount paid to another party to acquire an intangible (including a life insurance contract) from that party in a purchase or similar transaction. B paid $20,000 to A to acquire the life insurance contract from A, which is included in B’s cost basis. B also paid $9,000 in monthly premiums to prevent the contract from lapsing. No deduction is allowed for these monthly premiums under Sec. 264.

Regs. Sec. 1.263(a)-4(b)(1)(iv) authorizes the Service and Treasury to publish guidance that identifies a future benefit as an intangible for which capitalization is required. The premiums paid by a secondary market purchaser of a term life insurance contract serve to create or enhance a future benefit for which capitalization is appropriate. Accordingly, Rev. Rul. 2009-14 requires a secondary market purchaser to capitalize premiums paid to prevent a term life insurance contract (without cash value) from lapsing. However, the Service will not challenge the capitalization of such premiums paid or incurred prior to the issuance of this ruling.

Therefore, B’s adjusted basis for purposes of measuring gain on the sale to C was $29,000. Because the amount realized on B’s sale of the life insurance contract to C was $30,000 and the adjusted basis was $29,000, B must recognize $1,000 on the sale to C. The life insurance contract was property held by t he taxpayer not described in Secs. 1221(a) (1)–(8) so it is a capital asset. In addition, the contract was a term contract without any cash value, so there was no buildup inside the contract. Hence, the substitute for ordinary income doctrine under Midland- Ross does not apply, and the $1,000 of gain recognized b y B on the sale of the contract to C is long-term capital gain.

Observation: In the second situation described in Rev. Rul. 2009-13, the taxpayer was required to deduct “cost of insurance” charges from his basis in the policy because he had received the benefit of insurance coverage. However, in this case B, who is totally unrelated to A, purchased the insurance contract as an investment, paid the policy premiums purely to prevent the loss of the investment, and received no insurance coverage for his premium payments. Therefore, B is not required to reduce his basis in the policy by any cost of insurance charges.

Situation 3—Foreign investor: The facts are the same as in situation 1, except that B is a foreign corporation that is not engaged in a trade or business within the United States (including the trade or business of purchasing, or taking assignments of, life insurance contracts). As in situation 1, B must recognize $71,000 of ordinary income upon the receipt of death benefits. This income is “fixed or determinable annual or periodical” income within the meaning of Sec. 881(a)(1). (See Regs. Sec. 1.1441-2(b); Rev. Rul. 64-51; and Rev. Rul. 2004-75.) Consequently, B is subject to tax under Sec. 881(a) with respect to this income if the inc ome is from sources within the United States. In the current situation, A is a U.S. citizen residing in the United States, and the issuing insurance company is a domestic corporation. B’s income is from sources within the United States.

As demonstrated by Rev. Ruls. 2009-13 and 2009-14, the purchase and disposition of a life insurance contract may require the taxpayer and his or her adviser to analyze a multitude of Code sections to determine the amount of income to be recognized and the character of that income—which may render unanticipated results. Proper analysis and planning are therefore critical to avoid unfavorable outcomes.

EditorNotes

Stephen Aponte is a senior manager at Holtz Rubenstein Reminick LLP, DFK International/USA, in New York, NY.

Unless otherwise noted, contributors are members of or associated with DFK International/USA.

For additional information about these items, contact Mr. Aponte at (212) 792-4813 or [email protected] .

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Is a life insurance payout taxable? Here's what you need to know

Life insurance provides for your loved ones. but do they have to worry about uncle sam.

If you are the beneficiary of a life insurance policy, the payout — known as a death benefit — is typically tax-free. There are some exceptions, however.

Here's what you need to know about your tax liability if you receive proceeds from a life insurance policy.

When is life insurance taxed?

When withdrawing money from cash value
When surrendering the policy

When it's an employer-paid group life insurance

When the beneficiary is an estate, when payment is in installments, what to do with life insurance proceeds, bottom line, compare and find the right life insurance policy, when withdrawing money from the cash value.

Both whole life insurance and universal life insurance policies earn interest, referred to as cash value, and policyholders may be able to make withdrawals or take out a loan against the balance. If the withdrawal or loan is more than the total amount of premiums you've paid, the excess can be taxed.

MassMutual offers whole and universal life insurance up to age 60 or 90, depending on the policy. In 2023, it was one of JD Power's highest-ranking insurers for customer satisfaction and it received fewer complaints than expected for a company its size, according to the National Association of Insurance Commissioners.

MassMutual Life Insurance

The best way to estimate your costs is to request a quote

App available

Policy highlights.

MassMutual has been in business for over 170 years, and carries the highest ratings for financial security from AM Best.

When surrendering a policy

If you cancel a whole life or universal life insurance policy , you typically receive the cash surrender value, which is your policy's cash value minus any fees. You don't have to pay taxes on the principal when it's returned, but any cash value your policy has accrued will be taxed as income.

Pacific Life offers a cash value enhancement rider that increases the cash surrender value of your policy if you need to cancel it within the first 10 years. The California-based insurer has a variety of cash-value policies, including indexed universal life insurance, which earns interest by tracking an index like the S&P 500 , and variable life insurance, which allows the policyholder to directly invest in securities.

Pacific Life Life Insurance

Pacific Life offers permanent life insurance policies in addition to term insurance. A number of riders make it possible to customize the policy to fit your needs.

If you are receiving proceeds from an employer-paid life insurance policy, any death benefit beyond $50,000 is taxed as income, according to the IRS .

If you receive a policy payout in installments rather than as a lump sum, any interest that accrues is taxable. The principal death benefit is still not taxed.

If your estate is the beneficiary of your life insurance policy, the death benefit may be subject to estate taxes . In 2024, the federal estate tax ranges from 18% to 40%, depending on how much of the estate is over $13.61 million, the exclusion limit. for 2024 Without congressional action, the limit will revert to $5 million (indexed for inflation) at the start of 2026. In addition to the federal tax, twelve states and the District of Columbia impose an estate tax, with the exemption limit ranging from $1 million in Oregon to $13.61 million in Connecticut.

If you've received a life insurance death benefit, that money can help solidify your financial future.

Pay off debt

A life insurance payout can chip away at high-interest debt like credit card bills and help raise your credit score. (On-time payments represent 35% of your credit score and the total amount you owe is another 30%.) One way to address mounting card bills is a balance transfer to a card with a 0% introductory APR. The Wells Fargo Reflect® Card has no interest for 21 months from account opening on purchases and qualifying balance transfers (with an 18.24%, 24.74% or 29.99% variable APR after that). There's an intro balance transfer fee of 5% for each balance transfer, with a minimum of $5 completed within 120 days from account opening qualify for the introductory rate.

Wells Fargo Reflect® Card

Welcome bonus.

0% intro APR for 21 months from account opening on purchases and qualifying balance transfers.

Regular APR

18.24%, 24.74%, or 29.99% Variable APR on purchases and balance transfers

Balance transfer fee

5%, min: $5

Foreign transaction fee

Credit needed.

Excellent/Good

See rates and fees . Terms apply.

An emergency fund

It's a good rule of thumb to save at least three to six months' worth of living expenses. It should be an account you can make penalty-free withdrawals from to handle a job loss, medical emergency, home repairs or other unforeseen cost.

LendingClub 's high-yield savings account has one of the highest yields we've reviewed, with only a $100 opening balance requirement and a free ATM card.

LendingClub High-Yield Savings

Annual percentage yield (apy), minimum balance.

No minimum balance requirement after $100.00 to open the account

Monthly fee

Maximum transactions, excessive transactions fee, overdraft fees, offer checking account, offer atm card.

Terms apply.

UFB Secure Savings HYSA has a 5.25% annual percentage yield and no monthly fee or minimum balance requirement. Policyholders get a free ATM card and can transfer between direct deposit accounts for free.

UFB Secure Savings

Up to 5.25% APY on any savings balance; add a UFB Freedom Checking and meet checking account qualifications to get an additional up to 0.20% APY on savings

$0, no minimum deposit or balance needed for savings

No monthly maintenance or service fees

Overdraft fee

Overdraft fees may be charged, according to the terms ; overdraft protection available

Free ATM card with unlimited withdrawals

6 per month; terms apply

Read our UFB Secure Savings review .

Save for retirement

An IRA is a great tool for building your nest egg: In 2024, you can contribute a total of $7,000 to all your IRAs (or $8,000 if you're 50 or older). Fidelity 's IRA is a solid choice for beginners, combining an easy-to-navigate platform and a variety of investment options with no account fees or minimums.

Fidelity Investments

Minimum deposit and balance.

Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go® account, but minimum $10 balance according to the investment strategy chosen

Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)

Find special offers here

Investment vehicles

Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA ®

Investment options

Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares

Educational resources

Extensive tools and industry-leading, in-depth research from 20-plus independent providers

If you want a hands-off investing experience, Betterment is CNBC's top choice for robo-advisors , allowing you to open a traditional or Roth IRA with as little as $10. There is also a premium plan for savers investing at least $100,000 with unlimited access to certified financial planners.

Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn't require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.

Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.

Robo-advisor: Betterment Digital Investing IRA: Betterment Traditional, Roth and SEP IRAs 401(k): Betterment 401(k) for employers

Stocks, bonds, ETFs and cash

Betterment offers retirement and other education materials

Terms apply. Does not apply to crypto asset portfolios.

Find an investment account that works for you

Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox. Sign up here .

While life insurance benefits are typically not taxed, there are some circumstances when a payout can expose you to tax liability, including receiving it in installments.

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every insurance article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of insurance products . While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

Catch up on CNBC Select's in-depth coverage of credit cards , banking and money , and follow us on TikTok , Facebook , Instagram and Twitter to stay up to date.

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Business and industry

Insurance Policyholder Taxation Manual

Iptm7385 - other types of assignments, assignment to a trust by a settlor or from a trust to a beneficiary.

An assignment of a policy or a contract by a settlor into trust, or from a trust to its beneficiary or beneficiaries will not normally be for money or money’s worth and consequently will not be a chargeable event. Insurers may assume that there is no chargeable event unless there is information to suggest that the assignment was for money or money’s worth.

Assignment to a will beneficiary

Similarly, the assignment of a policy or contract from the executors of a will to a beneficiary under the will is unlikely to be for money or money’s worth.

Assignments between a director or other employee and a company

In general, any assignment between a company and an employee is unlikely to be a gift and is likely to be for money or money’s worth. Insurers should assume this is the case unless there is strong evidence to the contrary. There may be personal tax implications, but not under the chargeable event regime, where the policy is assigned to the employee.

Where a company director who is also a shareholder assigns a policy or contract to the company the assignment will almost certainly be for money or money’s worth since the shares held are likely to be worth more after the assignment than before.

Assignments between connected persons other than spouses or civil partners

If there is an assignment of a policy or contract between connected persons within the meaning of ICTA88/S839 other than spouses or civil partners living together then it is a chargeable event if for money or money’s worth.

Where there is a whole assignment for money or money’s worth in these circumstances, the value of the assignment is taken in the chargeable event calculation to be the market value of the policy at the time of the assignment. Insurers do not, however, need to report the value of a whole assignment.

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IMAGES

Model Format of Assignment Of Policy Of Life Insurance
What Is Collateral Assignment Life Insurance, And Why Do Borrowers Need
FREE 11+ Assignment of Insurance Policy Samples in PDF
INCOME TAX ON MATURITY OF LIFE INSURANCE POLICY
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VIDEO

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Taxation of Life Insurance Policy / Tax on Life Insurance Payout
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Tax Talk: Can You Deduct Officer's Life Insurance Premiums? Explained!
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INS200 LIFE INSURANCE:PRUDENTIAL PRUWITHYOU

COMMENTS

What are the tax implications if I transfer ownership of my life
While transferring ownership of a life insurance policy can have tax implications, there can also be potential tax advantages in certain situations. For example, if the policy has a high cash value and the original owner has a low basis, transferring ownership to another individual or entity may help reduce the tax burden on the original owner.
Understanding the Insurance Transfer-for-Value Rule
Example of Transfer-for-Value Rule . XYZ Corporation purchases a $10,000 life insurance policy on one of its key employees. It pays the premiums on this policy for five years, then transfers the ...
Tax Consequences of Transferring Life Insurance
The federal tax credit rate is 15%, so the maximum federal tax savings available is $300 ($2,000 x 15%). There are also provincial pension income amounts. By claiming them, clients receive the first $2,000 of pension income on a tax-free basis, but only if they're in the lowest tax bracket.
Common Mistakes in Life Insurance Arrangements
Common Mistakes in Life Insurance Arrangements. Ownership and beneficiary designations of a life insurance policy should be carefully considered to ensure that arrangements that seem practical do not have unintended income, gift, or estate tax consequences. In a Goodman triangle three parties are involved: the insured, the policy owner, and a ...
How to Avoid Taxation on Life Insurance Proceeds
Using Life Insurance Trusts to Avoid Taxation. A second way to remove life insurance proceeds from your taxable estate is to create an irrevocable life insurance trust (ILIT). To complete an ...
Guiding Clients Through the Transfer-for-Value Maze
Editor: Michael David Schulman, CPA/PFS One of the most attractive aspects of life insurance as an estate and financial planning tool is the tax treatment of the death proceeds. Generally, the proceeds of a life insurance policy received by a beneficiary are entirely free from income tax (Sec. 101(a)(1)). However,
What Is An Assignee On A Life Insurance Policy?
Tax Implications: Assigning a life insurance policy may have tax consequences for the assignee, such as potential income tax on the policy's cash value or estate tax implications. Consult with tax professionals before finalizing the assignment to fully understand these potential tax implications.
How to Transfer Life Insurance & Decrease Estate Tax
Method 2: Life Insurance Trusts. The second way to transfer a life insurance policy is to create an irrevocable life insurance trust and then put the policy in it. Once you transfer ownership of life insurance to the trust, you're no longer the owner, and the proceeds won't be part of your estate.
2 Ways to Transfer Ownership of a Life Insurance Policy
A policyowner can transfer either all or only some of the "bundle of rights" that comprises a life insurance policy to almost any person or entity. The two basic ways of making a lifetime transfer of a policy are: (1) the absolute assignment; and (2) the collateral assignment. An absolute assignment, as its name implies, transfers all the ...
How to Transfer a Life Insurance Policy
Beneficiaries: The people you name on your life insurance policy to receive the lump sum of money — also known as the death benefit — when you die. Cash value: The portion of a permanent life insurance policy's monetary value that grows tax-deferred over the life of the policy. Death benefit: The amount of money the life insurance company will pay your beneficiaries when you die.
Are the life insurance proceeds I received taxable?
the face amount of the policy, if specified in the policy. if you are receiving the proceeds in installments, whether there is a refund or period-certain guarantee. If federal income tax was withheld from the life insurance proceeds. The tool is designed for taxpayers who were U.S. citizens or resident aliens for the entire tax year for which ...
PDF The Often Overlooked Income Tax Rules of Life Insurance Policies
employer-owned life insurance The otherwise tax-free build-up of life insurance value may be subject to income tax if: 1. the cash value is accessed and the policy is a modified endowment contract; 2. the policy is surrendered, lapses, or sold; or 3. there are significant dividends or policy withdrawals or policy loans.
Tax Law Implications of Life Insurance
If you own a life insurance policy that has a beneficiary other than your spouse, and federal estate tax will apply to your estate, you may be able to avoid tax on the proceeds by transferring the ownership of your policy to another adult, such as the named beneficiary of the policy. Alternatively, you may be able to transfer the ownership of ...
Tax Consequences of Assigning Life Insuranceâ•flTime for Another Look
Tax Consequences of Assigning Life Insurance—Time for Another Look Douglas A. Kahn ... Federal Taxation of the Assignment of Life Insurance, 1977 Duke L.J. 941. 2. Under the terminology used in connection with life insurance, the insurer is the ... For gift tax purposes, a life insurance policy is valued on the date of the gift
Do Beneficiaries Pay Taxes on Life Insurance?
Life insurance is no exception. This means when a beneficiary receives life insurance proceeds after a period of interest accumulation rather than immediately upon the policyholder's death, the ...
Assignments of life policies and taxation
06 August 2001 •. Chris O'Neill looks at the tax consequences of assignments of life policies and the tax planning opportunities the rules offer. An assignment is a transfer of legal ownership from one party to another. Common types of assignment include assignments by way of gift, assignments by way of mortgage and assignments into (or out ...
Income from Sales or Settlements of Life Insurance Contracts
If B had surrendered the life insurance contract or held it to maturity, this inside buildup would have been taxed as ordinary income per Rev. Rul. 64-51. Hence, $14,000 of the $26,000 of income that A must recognize on the sale of the contract is ordinary income under the substitute for ordinary income doctrine.
How to Transfer a Life Insurance Policy to Someone Else
Trust vs. Individual Transfer. There are two basic ways to remove a life insurance policy from your taxable estate. The first is to place it in an irrevocable trust. A trustee takes control of the plan and makes sure premiums are paid and money is divided up according to your wishes after you're gone. The other option is to transfer ownership ...
PDF 43500 Assignment of Life Ins or Annuity Contract as ...
Assignment of Life Insurance Policy or Annuity Contract as Collateral. If you are a client of Ameriprise Financial, do not use this form. Please contact your Ameriprise financial advisor or call our office at 1-800-862-7919 for a copy of the correct form. For questions regarding the completion of this form, call our office at 1-800-333-3437.
IPTM7360
Part assignments for money or money's worth. An assignment of part of the rights (a 'part assignment') for money or money's worth might be a chargeable event in its own right if a ...
Is Life Insurance Taxable?
If your estate is the beneficiary of your life insurance policy, the death benefit may be subject to estate taxes. In 2024, the federal estate tax ranges from 18% to 40%, depending on how much of ...
PDF Transferring a life insurance policy from a corporation to a shareholder
When a corporation transfers a life insurance policy to a shareholder, there are tax consequences to both the corporation and shareholder. The resulting tax consequences depend on many factors, including whether the shareholder is an individual or a corporation, the tax attributes of the policy, and whether the shareholder paid anything for the ...
Other types of assignments
Assignments between a director or other employee and a company. In general, any assignment between a company and an employee is unlikely to be a gift and is likely to be for money or money's ...
PDF TAX IMPLICATIONS OF A LIFE INSURANCE POLICY TRANSFER
A life insurance policy transfer is a "disposition" within the meaning of subsection 148(9) of the Income Tax Act (ITA). Subsection 148(1) sets out the general rules that apply to the computation of tax in respect of a disposition. A life insurance policy transfer may trigger a policy gain, which is taxable in the ha nds of the transferor.
PDF Executive Branch Baseline Telework Policy
The State will not provide tax guidance; employees are encouraged to consult with a qualified tax professional to discuss income tax implications. 1.11. State owned equipment in use at an agreed upon telework location will be covered by an agency's insurance through the Office of the State Controller, Risk Management Division, subject to relevant