If a life insurance policy has been transferred-for-value to another party by the policy owner, the death benefit is taxed like a full surrender. What is this transfer called?

If a life insurance policy has been transferred-for-value to another party by the policy owner, the death benefit is taxed like a full surrender. What is this transfer called?

• A. transfer-for-value
• B. assignment
• C. endorsement
• D. beneficiary

Answer: (A)

The concept tested is the transfer-for-value rule for life insurance. When a policy is transferred for valuable consideration to someone other than the insured or a defined exception, the death benefit becomes partially taxable. Specifically, the death benefit is includible in gross income to the extent of any gain in the policy—that is, to the extent the value paid for the policy by the transferee exceeds the policy’s cost basis or premiums paid. In practical terms, the death benefit is taxed as if the policy had been surrendered for its cash value, with the taxable portion representing the gain. This differs from simple ownership changes or beneficiary changes, which do not automatically trigger this tax treatment.

The concept tested is the transfer-for-value rule for life insurance. When a policy is transferred for valuable consideration to someone other than the insured or a defined exception, the death benefit becomes partially taxable. Specifically, the death benefit is includible in gross income to the extent of any gain in the policy—that is, to the extent the value paid for the policy by the transferee exceeds the policy’s cost basis or premiums paid. In practical terms, the death benefit is taxed as if the policy had been surrendered for its cash value, with the taxable portion representing the gain.

This differs from simple ownership changes or beneficiary changes, which do not automatically trigger this tax treatment.