[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.101-1]

[Page 349-351]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.101-1  Exclusion from gross income of proceeds of life insurance 
contracts payable by reason of death.

    (a)(1) In general. Section 101(a)(1) states the general rule that 
the proceeds of life insurance policies, if paid by reason of the death 
of the insured, are excluded from the gross income of the recipient. 
Death benefit payments having the characteristics of life insurance 
proceeds payable by reason of death under contracts, such as workmen's 
compensation insurance contracts, endowment contracts, or accident and 
health insurance contracts, are covered by this provision. For 
provisions relating to death benefits paid by or on behalf of employers, 
see section 101(b) and Sec. 1.101-2. The exclusion from gross income 
allowed by section 101(a) applies whether payment is made to the estate 
of the insured or to any beneficiary (individual, corporation, or 
partnership) and whether it is made directly or in trust. The extent to 
which this exclusion applies in cases where life insurance policies have 
been transferred for a valuable consideration is stated in section 
101(a)(2) and in paragraph (b) of this section. In cases where the 
proceeds of a life insurance policy, payable by reason of the death of 
the insured, are paid other than in a single sum at the time of such 
death, the amounts to be excluded from gross income may be affected by 
the provisions of section 101 (c) (relating to amounts held under 
agreements to pay interest) or section 101(d) (relating to amounts 
payable at a date later than death). See Sec. Sec. 1.101-3 and 1.101-4. 
However, neither section 101(c) nor section 101(d) applies to a single 
sum payment which does not exceed the amount payable at the time of 
death even though such amount is actually paid at a date later than 
death.
    (2) Cross references. For rules governing the taxability of 
insurance proceeds constituting benefits payable on the death of an 
employee--
    (i) Under pension, profit-sharing, or stock bonus plans described in 
section 401(a) and exempt from tax under section 501(a), or under 
annuity plans described in section 403(a), see section 72 (m)(3) and 
paragraph (c) of Sec. 1.72-16;
    (ii) Under annuity contracts to which paragraph (a) or (b) of Sec. 
1.403(b)-1 applies, see paragraph (c)(3) of Sec. 1.403(b)-1; or
    (iii) Under eligible State deferred compensation plans described in 
section 457(b), see paragraph (c) of Sec. 1.457-1.

For the definition of a life insurance company, see section 801.
    (b) Transfers of life insurance policies. (1) In the case of a 
transfer, by assignment or otherwise, of a life insurance policy or any 
interest therein for a valuable consideration, the amount of the 
proceeds attributable to such policy or interest which is excludable 
from the transferee's gross income is generally limited to the sum of 
(i) the actual value of the consideration for such transfer, and (ii) 
the premiums and other amounts subsequently paid by the transferee (see 
section 101(a)(2) and example (1) of subparagraph (5) of this 
paragraph). However, this limitation on the amount excludable from the 
transferee's gross income does not apply (except in certain special 
cases involving a series of transfers), where the basis of the policy or 
interest transferred, for the purpose of determining gain or loss with 
respect to the transferee, is determinable, in whole or in part, by 
reference to the basis of such policy or interest in the hands of the 
transferor (see section 101(a)(2)(A) and examples (2) and (4) of 
subparagraph (5) of this paragraph). Neither does the limitation apply 
where the policy or interest therein is transferred

[[Page 350]]

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 (see section 101(a)(2)(B)). For rules relating to 
gratuitous transfers, see subparagraph (2) of this paragraph. For 
special rules with respect to certain cases where a series of transfers 
is involved, see subparagraph (3) of this paragraph.
    (2) In the case of a gratuitous transfer, by assignment or 
otherwise, of a life insurance policy or any interest therein, as a 
general rule the amount of the proceeds attributable to such policy or 
interest which is excludable from the transferee's gross income under 
section 101(a) is limited to the sum of (i) the amount which would have 
been excludable by the transferor (in accordance with this section) if 
no such transfer had taken place, and (ii) any premiums and other 
amounts subsequently paid by the transferee. See example (6) of 
subparagraph (5) of this paragraph. However, where the gratuitous 
transfer in question is made by or to the insured, a partner of the 
insured, a partnership in which the insured is a partner, or a 
corporation in which the insured is a shareholder or officer, the entire 
amount of the proceeds attributable to the policy or interest 
transferred shall be excludable from the transferee's gross income (see 
section 101(a)(2)(B) and example (7) of subparagraph (5) of this 
paragraph).
    (3) In the case of a series of transfers, if the last transfer of a 
life insurance policy or an interest therein is for a valuable 
consideration--
    (i) The general rule is that the final transferee shall exclude from 
gross income, with respect to the proceeds of such policy or interest 
therein, only the sum of--
    (a) The actual value of the consideration paid by him, and
    (b) The premiums and other amounts subsequently paid by him;
    (ii) If the final transfer is 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, the final 
transferee shall exclude the entire amount of the proceeds from gross 
income;
    (iii) Except where subdivision (ii) of this subparagraph applies, if 
the basis of the policy or interest transferred, for the purpose of 
determining gain or loss with respect to the final transferee, is 
determinable, in whole or in part, by reference to the basis of such 
policy or interest therein in the hands of the transferor, the amount of 
the proceeds which is excludable by the final transferee is limited to 
the sum of--
    (a) The amount which would have been excludable by his transferor if 
no such transfer had taken place, and
    (b) Any premiums and other amounts subsequently paid by the final 
transferee himself.
    (4) For the purposes of section 101(a)(2) and subparagraphs (1) and 
(3) of this paragraph, a ``transfer for a valuable consideration'' is 
any absolute transfer for value of a right to receive all or a part of 
the proceeds of a life insurance policy. Thus, the creation, for value, 
of an enforceable contractual right to receive all or a part of the 
proceeds of a policy may constitute a transfer for a valuable 
consideration of the policy or an interest therein. On the other hand, 
the pledging or assignment of a policy as collateral security is not a 
transfer for a valuable consideration of such policy or an interest 
therein, and section 101 is inapplicable to any amounts received by the 
pledgee or assignee.
    (5) The application of this paragraph may be illustrated by the 
following examples:

    Example (1). A pays premiums of $500 for an insurance policy in the 
face amount of $1,000 upon the life of B, and subsequently transfers the 
policy to C for $600. C receives the proceeds of $1,000 upon the death 
of B. The amount which C can exclude from his gross income is limited to 
$600 plus any premiums paid by C subsequent to the transfer.
    Example (2). The X Corporation purchases for a single premium of 
$500 an insurance policy in the face amount of $1,000 upon the life of 
A, one of its employees, naming the X Corporation as beneficiary. The X 
Corporation transfers the policy to the Y Corporation in a tax-free 
reorganization (the policy having a basis for determining gain or loss 
in the hands of the Y Corporation determined by reference to its basis 
in the hands of the X Corporation). The Y Corporation receives the 
proceeds of $1,000 upon the death of A.

[[Page 351]]

The entire $1,000 is to be excluded from the gross income of the Y 
Corporation.
    Example (3). The facts are the same as in example (2) except that, 
prior to the death of A, the Y Corporation transfers the policy to the Z 
Corporation for $600. The Z Corporation receives the proceeds of $1,000 
upon the death of A. The amount which the Z Corporation can exclude from 
its gross income is limited to $600 plus any premiums paid by the Z 
Corporation subsequent to the transfer of the policy to it.
    Example (4). The facts are the same as in example (3) except that, 
prior to the death of A, the Z Corporation transfers the policy to the M 
Corporation in a tax-free reorganization (the policy having a basis for 
determining gain or loss in the hands of the M Corporation determined by 
reference to its basis in the hands of the Z Corporation). The M 
Corporation receives the proceeds of $1,000 upon the death of A. The 
amount which the M Corporation can exclude from its gross income is 
limited to $600 plus any premiums paid by the Z Corporation and the M 
Corporation subsequent to the transfer of the policy to the Z 
Corporation.
    Example (5). The facts are the same as in example (3) except that, 
prior to the death of A, the Z Corporation transfers the policy to the N 
Corporation, in which A is a shareholder. The N Corporation receives the 
proceeds of $1,000 upon the death of A. The entire $1,000 is to be 
excluded from the gross income of the N Corporation.
    Example (6). A pays premiums of $500 for an insurance policy in the 
face amount of $1,000 upon his own life, and subsequently transfers the 
policy to his wife B for $600. B later transfers the policy without 
consideration to C, who is the son of A and B. C receives the proceeds 
of $1,000 upon the death of A. The amount which C can exclude from his 
gross income is limited to $600 plus any premiums paid by B and C 
subsequent to the transfer of the policy to B.
    Example (7). The facts are the same as in example (6) except that, 
prior to the death of A, C transfers the policy without consideration to 
A, the insured. A's estate receives the proceeds of $1,000 upon the 
death of A. The entire $1,000 is to be excluded from the gross income of 
A's estate.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6783, 29 FR 
18356, Dec. 24, 1964; T.D. 7836, 47 FR 42337, Sept. 27, 1982]