The "transfer-for-value" rule is an exception to the income tax-free status of life insurance death proceeds. If ownership of a policy is transferred for "valuable consideration," only death proceeds that exceed the amount of the valuable consideration, plus any premiums paid by the new owner after the transfer, will be received income tax-free. The balance will be taxed as ordinary income.

Exceptions to the transfer-for-value rule include the sale or transfer of any policy to:

• The insured;


• A partner of the insured;


• A partnership in which the insured is a principal; or


• A corporation in which the insured is an officer or shareholder.

Also, no transfer-for-value occurs if the transfer does not result in a change of the tax basis of the assets transferred. Transferring a policy to a co-shareholder of the insured in a corporation is not considered an exception to the transfer-for-value rule.