Taxation✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
Under the transfer-for-value rule, which transfer of a life insurance policy does NOT trigger the loss of the tax-free death benefit?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
IRC §101(a)(2) provides exceptions to the transfer-for-value rule. If the policy is transferred to the insured, the rule does not apply and the death benefit remains tax-free to the recipient. Other exempt transfers include transfers to a partner or to a partnership in which the insured is a partner, and transfers to a corporation in which the insured is a shareholder or officer. A sale to an unrelated investor or a stranger generally does trigger the rule, making the proceeds taxable to the buyer beyond their basis.
Why the other options are wrong
- B) A sale to an unrelated investor is the classic transfer-for-value case, so the proceeds would be taxable to the extent they exceed the purchase price and later premiums. That sale is the paradigm case of the rule.
- C) A transfer to a stranger lacking insurable interest is not among the statutory exceptions and triggers the rule, making death proceeds taxable beyond the buyer's basis. Strangers get no safe harbor.
- D) A sale to a business associate who is not a partner of the insured is not an exempt transfer, so the transfer-for-value rule applies to the proceeds. Only statutory exceptions protect the proceeds.
Memory hook
Transfer to the insured and the tax-free death benefit survives — one of the safe-harbor exceptions.