Tax TreatmentQuestion 708 of 716
The general rule that life insurance death proceeds are income-tax-free can be lost under the 'transfer-for-value' rule when the policy is:
a.Allowed to lapse for nonpayment of the premium in a year in which it was never sold or transferred to anyone
b.Sold or transferred for valuable consideration to certain parties, making part of the proceeds taxable
c.Paid up with level annual premiums and then held by the original owner until the insured's death
d.Owned by the insured's spouse, who paid all of the premiums from a joint checking account
Explanation
If a policy is transferred for value to a non-exempt party, the death benefit can become partly taxable, an exception to the usual income-tax-free rule. Simply keeping or paying up a policy does not trigger it.
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PrepPass team · Verified against California Life & Health Insurance License Exam · How we review
Reviewed by John Zihao Zhang — California-Licensed Life Insurance Agent (CA Dept. of Insurance License #4396095 — verify)