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Indexed Universal Life Transfer for Value

Indexed Universal Life Transfer for Value
Insurance Quotes 2 Day Team

Written By Doug Mitchell

Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA.  Doug has spent close to 30 years in the insurance and financial planning industry and has held licenses to sell securities, long-term care insurance, health.  Doug is also a financial blogger addressing the topics of life insurance, annuities and retirement income planning.

Holly Mitchell  &

Holly Mitchell’s background in life insurance insurance goes back to 1985 when she worked for her father who was a New York Life agent. Holly has a marketing degree from Auburn University and has had a life insurance license since 2008. In addition to advising life insurance for customers all around the country, Holly is our website fact checker.

Rob Pinner   &

Rob Pinner is the founder and CEO of Pinner Financial Services servicing all 50 states. Rob started his insurance career in 2002.

Louis LaBash

Results-driven and innovative life insurance professional with 30 plus years of life insurance industry sales and marketing experience. Recognized as a pioneer in the field, leveraging phone and internet channels to exceed personal sales of over $100 million during the first decade of the 21st century. Creator of a highly effective intuitive IUL life insurance sales software that facilitated the sale of millions of dollars of indexed universal policies by numerous life insurance agents. Proven track record as a Managing General Agent (MGA), Life Agent, IUL Life Insurance Sales Software developer, and leading-edge creator of insurance marketing tools, educational content, and delivery systems.

 4 minute read

One of the most important features of any type of life insurance policy is that the death benefit is typically paid to the beneficiary tax-exempt.

However, it didn’t take long before speculators figured out that transferring life insurance policies from one party to another could result in a tax-free windfall. When in comes to IULs, the IRS designed the Indexed Universal Life transfer for value rule.

To dissuade policyholders and policy purchasers from doing this, tax-hungry legislators announced that any type of life insurance policy that is transferred from one party to another for any consideration could be subject to income taxes when the death benefit of the transferred insurance policy is finally paid to the beneficiary (the purchasing party).

This highly unpopular rule is known as the transfer-for-value rule. Moreover, the new rule is one of the few instances when a beneficiary is subject to tax liability following the death of the insured.

Fortunately, this rule does come with a few exceptions. In this article, we’ll discuss the conditions and exceptions associated with the Indexed Universal Life transfer for value rule.

What is the Transfer-for-Value Rule?

In simple terms, when a life insurance policy is sold, the new owner can be taxed on the amount of money that results from the payment of the death benefit by the insurance company.

The transfer-for-value rule will apply if the policy is transferred from the original policyholder to a new policyholder for any valuable consideration (money). The portion of the death benefit that will not be taxable is the sum of the valuable consideration plus any insurance premiums paid into the life insurance policy after the completion of the transfer. The remaining balance of the death benefit will then be taxed as ordinary income.

Exceptions to the Rule

According to Sec. 101(a)(2), there are five exceptions to the transfer-for-value rule. These exceptions allow the life insurance proceeds to be distributed and then received tax-free, even when there is consideration given for the transfer of the insurance policy as long as the transfer of interest in the life insurance policy is transferred to the following:

  • The named insured in the policy or the named insured’s grantor trust
  • A corporation in which the insured is a shareholder, stakeholder, or officer of the company (for-profit or non-profit).
  • A partnership in which the named insured is a partner
  • A partner of the named insured
  • Between corporations in a tax-free reorganization, if certain conditions exist
  • When the transfer qualifies as a gift from the named insured (no consideration given)

According to the IRS, the term “transfer for valuable consideration” is defined as:

for purposes of § 101(a)(2) in § 1.101-1(b)(4) of the Income Tax Regulations as any absolute transfer for value of a right to receive all or a part of the proceeds of a life insurance policy. Section 101(a)(2)(B) provides that § 101(a)(2) does not apply to a transfer of a life insurance contract or any interest therein to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer.”

When the Transfer-for-Value Rule Often Applies

Generally, the transfer-for-value rule is triggered when a business or its owner transfers a life insurance policy to another owner of the business for money or other valuable consideration (or service).

With business owners, the transfer is generally a promise between the co-owners to name each other as beneficiaries of the policy or a promise to use the death benefit to purchase the other’s business interests after the death of one of the co-owners.

Even though “gifts” will not generally be considered as a trigger for the transfer-of-value rule, it would be hard for either party to argue that the transfer of a life insurance policy from one business co-owner to another is actually considered a gift according to the IRS.

For this reason, any parties who are planning to engage in the purchase of a life insurance policy should discuss their intentions with a qualified insurance professional like the team at Ogletree Financial before proceeding with the transaction. Especially, if the life insurance policy is going to be used to fund a buy-sell agreement between the owners of a business.

Additionally, it’s important to note that the transfer-of-value is predicated on the death benefit of the insurance policy which means the type of life insurance policy does not matter. The rules for indexed universal life insurance transfer of value are the same as whole life insurance and term life insurance as well.

A Simple Example of the Transfer of Value Rule

John Smith owns a real estate insurance brokerage and purchased a $100,000 term life insurance policy on one of his key producers. The insurance brokerage is the policyowner and pays the premiums on the policy until they decide to transfer the policy to another agent for $5,000. The newly hired agent then becomes responsible for the premium payments and is the sole beneficiary of the policy.

When the original key producer (named insured) passes away, the new owner of the policy will be taxed on the $100,000 death benefit minus the $5,000 consideration for the policy and the sum of all premiums paid on the insurance policy.

Even though the transfer-for-value rule was triggered by the transfer of the life insurance policy, the newly hired agent who purchased the policy will be subject to income tax on a large portion of the death benefit, the policy transfer delivered a considerable profit to the newly hired agent who purchased the policy.

In Conclusion

If you or your business are considering becoming a party to a life insurance policy transfer it is important to be aware of the transfer of value rule. If you are uncertain whether or not the transfer will trigger the tax liability created by this rule, call us to find out if the transfer will be taxable or exempt.

author avatar
Doug Mitchell, CLU Independant Advisor
Doug Mitchell, CLU holds a BA degree in Finance from Auburn University as well as having obtained a Chartered Life Underwriter (CLU) designation from The American College in Bryn Mahr, PA. Doug has spent almost 30 years in the life insurance industry and has also held licenses to sell securities, long-term care insurance and home and auto insurance. Doug is a Top of the Table Million Dollar Round Table member (MDRT).  MDRT is a global, independent association of the world's leading life insurance advisors.  For two years, Doug served as President of the Auburn Opelika Association of Financial Advisors and has been a member of the Million Dollar Round Table. He obtained Life Millionaire status at Horace Mann Insurance Company and was awarded the Life Agent of the Year Award. Later in his career with New York Life he was an Executive Council Member. Doug currently serves as President of Ogletree Financial, a managing general agency serving life insurance agents and clients in all parts of the United States. Today, Doug’s main focus is servicing 1000s of policyholders and growing the agency through the reach of