Transfer-for-value rule is a tax provision under IRC Section 101(a)(2) that can cause life insurance death benefits to lose their income tax-free status when a policy or interest in a policy is transferred for valuable consideration to certain parties. If the rule is triggered, the death benefit in excess of the transferor's basis (purchase price plus later premiums) becomes taxable income, subject to limited exceptions such as transfers to the insured, a partner of the insured, a partnership or corporation of which the insured is a partner or shareholder, or a transferee whose basis is determined in whole or in part by the transferor's basis. The transfer-for-value rule is particularly relevant in business transfers, cross-owned policies, and life settlement transactions.

Advisors and tax professionals evaluate the transfer-for-value rule whenever ownership of a life policy is changing hands for consideration, such as restructuring buy-sell agreements, corporate reorganizations, or selling policies to third parties. They structure transactions to fit within statutory exceptions-for example, using partnership or corporate relationships-or consider alternative strategies like new policies or tax-efficient rollovers. In estate and business planning, avoiding inadvertent transfer-for-value violations is critical to preserving income tax-free death benefits. Understanding the transfer-for-value rule helps advisors coordinate with legal counsel, document transactions properly, and safeguard the core tax advantage of life insurance in advanced planning designs.