[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: 26CFR1.101-4]

[Page 361-367]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.101-4  Payment of life insurance proceeds at a date later than 
death.

    (a) In general. (1)(i) Section 101(d) states the provisions 
governing the exclusion from gross income of amounts (other than those 
to which section 101(c) applies) received under a life insurance 
contract and paid by reason of the death of the insured which are paid 
to a beneficiary on a date or dates later than the death of the insured. 
However, if the amounts payable as proceeds of life insurance to which 
section 101(a)(1) applies cannot in any event exceed the amount payable 
at the time of the insured's death, such amounts are fully excludable 
from the gross income of the recipient (or recipients) without regard to 
the actual time of payment and no further determination need be made 
under this section. Section 101(d)(1)(A) provides an exclusion from 
gross income of any amount determined by a proration, under applicable 
regulations, of ``an amount held by an insurer with respect to any 
beneficiary''. The quoted phrase is defined in section 101(d)(2). For 
the regulations governing the method of computation of this proration, 
see paragraphs (c) through (f) of this section. The prorated amounts are 
to be excluded from the gross income of the beneficiary regardless of 
the taxable year in which they are actually received (see example (2) of 
subparagraph (2) of this paragraph).
    (ii) Section 101(d)(1)(B) provides an additional exclusion where 
life insurance proceeds are paid to the surviving spouse of an insured. 
For purposes of this exclusion, the term ``surviving spouse'' means the 
spouse of the insured as of the date of death, including a spouse 
legally separated, but not under a decree of absolute divorce (section 
101(d)(3)). To the extent that the total payments, under one or more 
agreements, made in excess of the amounts determined by proration under 
section 101(d)(1)(A) do not exceed $1,000 in the taxable year of 
receipt, they shall be excluded from the gross

[[Page 362]]

income of the surviving spouse (whether or not payment of any part of 
such amounts is guaranteed by the insurer). Amounts excludable under 
section 101(d)(1)(B) are not ``prorated'' amounts.
    (2) The principles of this paragraph may be illustrated by the 
following examples:

    Example (1). A surviving spouse elects to receive all of the life 
insurance proceeds with respect to one insured, amounting to $150,000, 
in ten annual installments of $16,500 each, based on a certain 
guaranteed interest rate. The prorated amount is $15,000 ($150,000/10). 
As the second payment, the insurer pays $17,850, which exceeds the 
guaranteed payment by $1,350 as the result of earnings of the insurer in 
excess of those required to pay the guaranteed installments. The 
surviving spouse shall include $1,850 in gross income and exclude 
$16,000--determined in the following manner:

Fixed payment (including guaranteed interest).................   $16,500
Excess interest...............................................     1,350
                                                               ---------
    Total payment.............................................    17,850
Prorated amount...............................................    15,000
                                                               ---------
    Excess over prorated amount...............................     2,850
Annual excess over prorated amount excludable under section        1,000
 101(d)(1)(B).................................................
                                                               ---------
    Amount includible in gross income.........................     1,850


    Example (2). Assume the same facts as in example (1), except that 
the third and fourth annual installments, totalling $33,000 (2x$16,500), 
are received in a single subsequent taxable year of the surviving 
spouse. The prorated amount of $15,000 of each annual installment, 
totalling $30,000, shall be excluded even though the spouse receives 
more than one annual installment in the single subsequent taxable year. 
However, the surviving spouse is entitled to only one exclusion of 
$1,000 under section 101(d)(1)(B) for each taxable year of receipt. The 
surviving spouse shall include $2,000 in her gross income for the 
taxable year with respect to the above installment payments ($33,000 
less the sum of $30,000 plus $1,000).
    Example (3). Assume the same facts as in example (1), except that 
the surviving spouse dies before receiving all ten annual installments 
and the remaining installments are paid to her estate or beneficiary. In 
such a case, $15,000 of each installment would continue to be excludable 
from the gross income of the recipient, but any amounts received in 
excess thereof would be fully includible.

    (b) Amount held by an insurer. (1) For the purpose of the proration 
referred to in section 101(d)(1), an ``amount held by an insurer with 
respect to any beneficiary'' means an amount equal to the present value 
to such beneficiary (as of the date of death of the insured) of an 
agreement by the insurer under a life insurance policy (whether as an 
option or otherwise) to pay such beneficiary an amount or amounts at a 
date or dates later than the death of the insured (section 101(d)(2)). 
The present value of such agreement is to be computed as if the 
agreement under the life insurance policy had been entered into on the 
date of death of the insured, except that such value shall be determined 
by the use of the mortality table and interest rate used by the insurer 
in calculating payments to be made to the beneficiary under such 
agreement. Where an insurance policy provides an option for the payment 
of a specific amount upon the death of the insured in full discharge of 
the contract, such lump sum is the amount held by the insurer with 
respect to all beneficiaries (or their beneficiaries) under the 
contract. See, however, paragraph (e) of this section.
    (2) In the case of two or more beneficiaries, the ``amount held by 
the insurer'' with respect to each beneficiary depends on the 
relationship of the different benefits payable to such beneficiaries. 
Where the amounts payable to two or more beneficiaries are independent 
of each other, the ``amount held by the insurer with respect to each 
beneficiary'' shall be determined and prorated over the periods involved 
independently. Thus, if a certain amount per month is to be paid to A 
for his life, and, concurrently, another amount per month is to be paid 
to B for his life, the ``amount held by the insurer'' shall be 
determined and prorated for both A and B independently, but the 
aggregate shall not exceed the total present value of such payments to 
both. On the other hand, if the obligation to pay B was contingent on 
his surviving A, the ``amount held by the insurer'' shall be considered 
an amount held with respect to both beneficiaries simultaneously. 
Furthermore, it is immaterial whether B is a named beneficiary or merely 
the ultimate recipient of payments for a term of years. For the special 
rules governing the computation of the proration of the ``amount held by 
an insurer'' in determining amounts excludable under the

[[Page 363]]

provisions of section 101(d), see paragraphs (c) to (f), inclusive, of 
this section.
    (3) Notwithstanding any other provision of this section, if the 
policy was transferred for a valuable consideration, the total ``amount 
held by an insurer'' cannot exceed the sum of the consideration paid 
plus any premiums or other consideration paid subsequent to the transfer 
if the provisions of section 101(a)(2) and paragraph (b) of Sec. 1.101-
1 limit the excludability of the proceeds to such total.
    (c) Treatment of payments for life to a sole beneficiary. If the 
contract provides for the payment of a specified lump sum, but, pursuant 
to an agreement between the beneficiary and the insurer, payments are to 
be made during the life of the beneficiary in lieu of such lump sum, the 
lump sum shall be divided by the life expectancy of the beneficiary 
determined in accordance with the mortality table used by the insurer in 
determining the benefits to be paid. However, if payments are to be made 
to the estate or beneficiary of the primary beneficiary in the event 
that the primary beneficiary dies before receiving a certain number of 
payments or a specified total amount, such lump sum shall be reduced by 
the present value (at the time of the insured's death) of amounts which 
may be paid by reason of the guarantee, in accordance with the 
provisions of paragraph (e) of this section, before making this 
calculation. To the extent that payments received in each taxable year 
do not exceed the amount found from the above calculation, they are 
``prorated amounts'' of the ``amount held by an insurer'' and are 
excludable from the gross income of the beneficiary without regard to 
whether he lives beyond the life expectancy used in making the 
calculation. If the contract in question does not provide for the 
payment of a specific lump sum upon the death of the insured as one of 
the alternative methods of payment, the present value (at the time of 
the death of the insured) of the payments to be made the beneficiary, 
determined in accordance with the interest rate and mortality table used 
by the insurer in determining the benefits to be paid, shall be used in 
the above calculation in lieu of a lump sum.
    (d) Treatment of payments to two or more beneficiaries--(1) 
Unrelated payments. If payments are to be made to two or more 
beneficiaries, but the payments to be made to each are to be made 
without regard to whether or not payments are made or continue to be 
made to the other beneficiaries, the present value (at the time of the 
insured's death) of such payments to each beneficiary shall be 
determined independently for each such beneficiary. The present value so 
determined shall then be divided by the term for which the payments are 
to be made. If the payments are to be made for the life of the 
beneficiary, the divisor shall be the life expectancy of the 
beneficiary. To the extent that payments received by a beneficiary do 
not exceed the amount found from the above calculation, they are 
``prorated amounts'' of the ``amount held by an insurer'' with respect 
to such beneficiary and are excludable from the gross income of the 
beneficiary without regard to whether he lives beyond any life 
expectancy used in making the calculation. For the purpose of the 
calculation described above, both the ``present value'' of the payments 
to be made periodically and the ``life expectancy'' of the beneficiary 
shall be determined in accordance with the interest rate and mortality 
table used by the insurer in determining the benefits to be paid. If 
payments are to be made to the estate or beneficiary of a primary 
beneficiary in the event that such beneficiary dies before receiving a 
certain number of payments or a specified total amount, the ``present 
value'' of payments to such beneficiary shall not include the present 
value (at the time of the insured's death) of amounts which may be paid 
by reason of such a guarantee. See paragraph (e) of this section.
    (2) Related payments. If payments to be made to two or more 
beneficiaries are in the nature of a joint and survivor annuity (as 
described in paragraph (b) of Sec. 1.72-5), the present value (at the 
time of the insured's death) of the payments to be made to all such 
beneficiaries shall be divided by the life expectancy of such 
beneficiaries as

[[Page 364]]

a group. To the extent that the payments received by a beneficiary do 
not exceed the amount found from the above calculation, they are 
``prorated amounts'' of the ``amount held by an insurer'' with respect 
to such beneficiary and are excludable from the gross income of the 
beneficiary without regard to whether all the beneficiaries involved 
live beyond the life expectancy used in making the calculation. For the 
purpose of the calculation described above, both the ``present value'' 
of the payments to be made periodically and the ``life expectancy'' of 
all the beneficiaries as a group shall be determined in accordance with 
the interest rate and mortality table used by the insurer in determining 
the benefits to be paid. If the contract provides that certain payments 
are to be made in the event that all the beneficiaries of the group die 
before a specified number of payments or a specified total amount is 
received by them, the present value of payments to be made to the group 
shall not include the present value (at the time of the insured's death) 
of amounts which may be paid by reason of such a guarantee. See 
paragraph (e) of this section.
    (3) Payments to secondary beneficiaries. Payments made by reason of 
the death of a beneficiary (or beneficiaries) under a contract providing 
that such payments shall be made in the event that the beneficiary (or 
beneficiaries) die before receiving a specified number of payments or a 
specified total amount shall be excluded from the gross income of the 
recipient to the extent that such payments are made solely by reason of 
such guarantee.
    (e) Treatment of present value of guaranteed payments. In the case 
of payments which are to be made for a life or lives under a contract 
providing that further amounts shall be paid upon the death of the 
primary beneficiary (or beneficiaries) in the event that such 
beneficiary (or beneficiaries) die before receiving a specified number 
of payments or a specified total amount, the present value (at the time 
of the insured's death) of all payments to be made under the contract 
shall not include, for purposes of prorating the amount held by the 
insurer, the present value of the payments which may be made to the 
estate or beneficiary of the primary beneficiary. In such a case, any 
lump sum amount used to measure the value of the amount held by an 
insurer with respect to the primary beneficiary must be reduced by the 
value at the time of the insured's death of any amounts which may be 
paid by reason of the guarantee provided for a secondary beneficiary or 
the estate of the primary beneficiary before prorating such lump sum 
over the life or lives of the primary beneficiaries. Such present value 
(of the guaranteed payment) shall be determined by the use of the 
interest rate and mortality tables used by the insurer in determining 
the benefits to be paid.
    (f) Treatment of payments not paid periodically. Payments made to 
beneficiaries other than periodically shall be included in the gross 
income of the recipients, but only to the extent that they exceed 
amounts payable at the time of the death of the insured to each such 
beneficiary or, where no such amounts are specified, the present value 
of such payments at that time.
    (g) Examples. The principles of this section may be illustrated by 
the following examples:

    Example (1). A life insurance policy provides for the payment of 
$20,000 in a lump sum to the beneficiary at the death of the insured. 
Upon the death of the insured, the beneficiary elects an option to leave 
the proceeds with the company for five years and then receive payment of 
$24,000, having no claim of right to any part of such sum before the 
entire five years have passed. Upon the payment of the larger sum, 
$24,000, the beneficiary shall include $4,000 in gross income and 
exclude $20,000 therefrom. If it is assumed that the same insurer has 
determined the benefits to be paid, the same result would obtain if no 
lump sum amount were provided for at the death of the insured and the 
beneficiary were to be paid $24,000 five years later. In neither of 
these cases would the surviving spouse be able to exclude any additional 
amount from gross income since both cases involve an amount held by an 
insurer under an agreement to pay interest thereon to which section 
101(c) applies, rather than an amount to be paid periodically after the 
death of the insured to which section 101(d) applies.
    Example (2). A life insurance policy provides that $1,200 per year 
shall be paid the sole beneficiary (other than a surviving spouse) until 
a fund of $20,000 and interest

[[Page 365]]

which accrues on the remaining balance is exhausted. A guaranteed rate 
of interest is specified, but excess interest may be credited according 
to the earnings of the insurer. Assuming that the fund will be exhausted 
in 20 years if only the guaranteed interest is actually credited, the 
beneficiary shall exclude $1,000 of each installment received ($20,000 
divided by 20) and any installments received, whether by the beneficiary 
or his estate or beneficiary, in excess of 20 shall be fully included in 
the gross income of the recipient. If, instead, the excess interest were 
to be paid each year, any portion of each installment representing an 
excess over $1,000 would be fully includible in the recipient's gross 
income. Thus, if an installment of $1,350 were received, $350 of it 
would be included in gross income.
    Example (3). Assume that the sole life insurance policy of a 
decedent provides only for the payment of $5,000 per year for the life 
of his surviving spouse, beginning with the insured's death. If the 
present value of the proceeds, determined by reference to the interest 
rate and the mortality table used by the insurance company, is $60,000, 
and such beneficiary's life expectancy is 20 years, $3,000 of each 
$5,000 payment ($60,000 divided by 20) is excludable as the prorated 
portion of the ``amount held by an insurer''. For each taxable year in 
which a payment is made, an additional $1,000 is excludable from the 
gross income of the surviving spouse. Hence, if she receives only one 
$5,000 payment in her taxable year, only $1,000 is includible in her 
gross income in that year with respect to such payment ($5,000 less the 
total amount excludable, $4,000). Assuming that the policy also provides 
for payments of $2,000 per year for 10 years to the daughter of the 
insured, the present value of the payments to the daughter is to be 
computed separately for the purpose of determining the excludable 
portion of each payment to her. Assuming that such present value is 
$15,000, $1,500 of each payment of $2,000 received by the daughter is 
excludable from her gross income ($15,000 divided by 10). The remaining 
$500 shall be included in the gross income of the daughter.
    Example (4). Beneficiaries A and B, neither of whom is the surviving 
spouse of the insured, are each to receive annual payments of $1,800 for 
each of their respective lives upon the death of the insured. The 
contract does not provide for payments to be made in any other manner. 
Assuming that the present value of the payments to be made to A, whose 
life expectancy according to the insurer's mortality table is 30 years, 
is $36,000, A shall exclude $1,200 of each payment received ($36,000 
divided by 30). Assuming that the present value of the payments to be 
made to B, whose life expectancy according to the insurer's mortality 
table is 20 years, is $27,000, B shall exclude $1,350 of each payment 
received ($27,000 divided by 20).
    Example (5). A life insurance policy provides for the payment of 
$76,500 in a lump sum to the beneficiary, A, at the death of the 
insured. Upon the insured's death, however, A selects an option for the 
payment of $2,000 per year for her life and for the same amount to be 
paid after her death to B, her daughter, for her life. Assuming that 
since A is 51 years of age and her daughter is 28 years of age, the 
insurer determined the amount of the payments by reference to a 
mortality table under which the life expectancy for the lives of both A 
and B, joint and survivor, is 51 years, $1,500 of each $2,000 payment to 
either A or B ($76,500 divided by 51, or $1,500) shall be excluded from 
the gross income of the recipient. However, if A is the surviving spouse 
of the insured and no other contracts of insurance whose proceeds are to 
be paid to her at a date later than death are involved, A shall exclude 
the entire payment of $2,000 in any taxable year in which she receives 
but one such payment because of the additional exclusion under section 
101(d)(1)(B).
    Example (6). Beneficiaries A and B, neither of whom is the surviving 
spouse of the insured, are each to receive annual payments of $1,800 for 
each of their respective lives upon the death of the insured, but after 
the death of either, the survivor is to receive the payments formerly 
made to the deceased beneficiary until the survivor dies. Assuming that 
the life expectancy, joint and survivor, of A and B in accordance with 
the mortality table used by the insurer is 32 years and assuming that 
the total present value of the benefits to both (determined in 
accordance with the interest rate used by the insurer) is $80,000, A and 
B shall each exclude $1,250 of each installment of $1,800 ($80,000 
divided by the life expectancy, 32, multiplied by the fraction of the 
annual payment payable to each, one-half) until the death of either. 
Thereafter, the survivor shall exclude $2,500 of each installment of 
$3,600 ($80,000 divided by 32).
    Example (7). A life insurance policy provides for the payment of 
$75,000 in a lump sum to the beneficiary, A, at the death of the 
insured. A, upon the insured's death, however, selects an option for the 
payment of $4,000 per year for life, with a guarantee that any part of 
the $75,000 lump sum not paid to A before his death shall be paid to B 
(or his estate). A's beneficiary. Assuming that, under the criteria used 
by the insurer in determining the benefits to be paid, the present value 
of the guaranteed amount to B is $13,500 and that A's life expectancy is 
25 years, the lump sum shall be reduced by the present value of the 
guarantee to B ($75,000 less $13,500, or $61,500) and divided by A's 
life expectancy ($61,500 divided by 25, or $2,460). Hence, $2,460 of 
each $4,000 payment is excludable from A's gross income. If A is the

[[Page 366]]

surviving spouse of the insured and no other contracts of insurance 
whose proceeds are to be paid to her at a date later than death are 
involved, A shall exclude $3,460 of each $4,000 payment from gross 
income in any taxable year in which but one such payment is received. 
Under these facts, if any amount is paid to B by reason of the fact that 
A dies before receiving a total of $75,000, the residue of the lump sum 
paid to B shall be excluded from B's gross income since it is wholly in 
lieu of the present value of such guarantee plus the present value of 
the payments to be made to the first beneficiary, and is therefore 
entirely an ``amount held by an insurer'' paid at a date later than 
death (see paragraph (d)(3) of this section).
    Example (8). Assume that an insurance policy does not provide for 
the payment of a lump sum, but provides for the payment of $1,200 per 
year for a beneficiary's life upon the death of the insured, and also 
provides that if ten payments are not made to the beneficiary before 
death a secondary beneficiary (whether named by the insured or by the 
first beneficiary) shall receive the remainder of the ten payments in 
similar installments. If, according to the criteria used by the 
insurance company in determining the benefits, the present value of the 
payments to the first beneficiary is $12,000 and the life expectancy of 
such beneficiary is 15 years, $800 of each payment received by the first 
beneficiary is excludable from gross income. Assuming that the same 
figures obtain even though the payments are to be made at the rate of 
$100 per month, the yearly exclusion remains the same unless more or 
less than twelve months' installments are received by the beneficiary in 
a particular taxable year. In such a case two-thirds of the total 
received in the particular taxable year with respect to such beneficiary 
shall be excluded from gross income. Under either of the above 
alternatives, any amount received by the second beneficiary by reason of 
the guarantee of ten payments is fully excludable from the beneficiary's 
gross income since it is wholly in lieu of the present value of such 
guarantee plus the present value of the payments to be made to the first 
beneficiary and is therefore entirely an ``amount held by an insurer'' 
paid at a date later than death (see paragraph (d)(3) of this section).

    (h) Applicability of both section 101(c) and 101(d) to payments 
under a single life insurance contract--(1) In general. Section 101(d) 
shall not apply to interest payments on any amount held by an insurer 
under an agreement to pay interest thereon (see sections 101(c) and 
101(d)(4) and Sec. 1.101-3). On the other hand, both section 101(c) and 
section 101(d) may be applicable to payments received under a single 
life insurance contract, if such payments consist both of interest on an 
amount held by an insurer under an agreement to pay interest thereon and 
of amounts held by the insurer and paid on a date or dates later than 
the death of the insured. One instance when both section 101(c) and 
section 101(d) may be applicable to payments received under a single 
life insurance contract is in the case of a permanent life insurance 
policy with a family income rider attached. A typical family income 
rider is one which provides additional term insurance coverage for a 
specified number of years from the register date of the basic policy. 
Under the policy with such a rider, if the insured dies at any time 
during the term period, the beneficiary is entitled to receive (i) 
monthly payments of a specified amount commencing as of the date of 
death and continuing for the balance of the term period, and (ii) a lump 
sum payment of the proceeds under the basic policy to be paid at the end 
of the term period. If the insured dies after the expiration of the term 
period, the beneficiary receives only the proceeds under the basic 
policy. If the insured dies before the expiration of the term period, 
part of each monthly payment received by the beneficiary during the term 
period consists of interest on the proceeds of the basic policy (such 
proceeds being retained by the insurer until the end of the term 
period). The remaining part consists of an installment (principal plus 
interest) of the proceeds of the terms insurance purchased under the 
family income rider. The amount of term insurance which is provided 
under the family income rider is, therefore, that amount which, at the 
date of the insured's death, will provide proceeds sufficient to fund 
such remaining part of each monthly payment. Since the proceeds under 
the basic policy are held by the insurer until the end of the term 
period, that portion of each monthly payment which consists of interest 
on such proceeds is interest on an amount held by an insurer under an 
agreement to pay interest thereon and is includible in gross income 
under section 101(c). On the other hand, since the remaining portion of 
each monthly payment consists of an installment payment (principal plus 
interest) of the

[[Page 367]]

proceeds of the term insurance, it is a payment of an amount held by the 
insurer and paid on a date later than the death of the insured to which 
section 101(d) and this section applies (including the $1,000 exclusion 
allowed the surviving spouse under section 101(d)(1)(B)). The proceeds 
of the basic policy, when received in a lump sum at the end of the term 
period, are excludable from gross income under section 101(a).
    (2) Example of tax treatment of amounts received under a family 
income rider. The following example illustrates the application of the 
principles contained in subparagraph (1) of this paragraph to payments 
received under a permanent life insurance policy with a family income 
rider attached:

    Example. The sole life insurance policy of the insured provides for 
the payment of $100,000 to the beneficiary (the insured's spouse) on his 
death. In addition, there is attached to the policy a family income 
rider which provides that, if the insured dies before the 20th 
anniversary of the basic policy, the beneficiary shall receive (i) 
monthly payments of $1,000 commencing on the date of the insured's death 
and ending with the payment prior to the 20th anniversary of the basic 
policy, and (ii) a single payment of $100,000 payable on the 20th 
anniversary of the basic policy. On the date of the insured's death, the 
beneficiary (surviving spouse of the insured) is entitled to 36 monthly 
payments of $1,000 and to the single payment of $100,000 on the 20th 
anniversary of the basic policy. The value of the proceeds of the term 
insurance at the date of the insured's death is $28,409.00 (the present 
value of the portion of the monthly payments to which section 101(d) 
applies computed on the basis that the interest rate used by the insurer 
in determining the benefits to be paid under the contract is 2\1/4\ 
percent). The amount of each monthly payment of $1,000 which is 
includible in the beneficiary's gross income is determined in the 
following manner:

(a) Total amount of monthly payment.........................   $1,000.00
(b) Amount includible in gross income under section 101(c)        185.00
 as interest on the $100,000 proceeds under the basic policy
 held by the insurer until 20th anniversary of the basic
 policy (computed on the basis that the interest rate used
 by the insurer in determining the benefits to be paid under
 the contract is 2\1/4\ percent)............................
(c) Amount to which section 101(d) applies ((a) minus (b))..      815.00
(d) Amount excludable from gross income under section 101(d)      789.14
 ($28,409/36)...............................................
(e) Amount includible in gross income under section 101(d)         25.86
 without taking into account the $1,000 exclusion allowed
 the beneficiary as the surviving spouse ((c) minus (d))....



The beneficiary, as the surviving spouse of the insured, is entitled to 
exclude the amounts otherwise includible in gross income under section 
101(d) (item (e)) to the extent such amounts do not exceed $1,000 in the 
taxable year of receipt. This exclusion is not applicable, however, with 
respect to the amount of each payment which is includible in gross 
income under section 101(c) (item (b)). In this example, therefore, the 
beneficiary must include $185 of each monthly payment in gross income 
(amount includible under section 101(c)), but may exclude the $25.86 
which is otherwise includible under section 101(d). The payment of 
$100,000 which is payable to the beneficiary on the 20th anniversary of 
the basic policy will be entirely excludable from gross income under 
section 101(a).

    (3) Limitation on amount considered to be an ``amount held by an 
insurer''. See paragraph (b)(3) of this section for a limitation on the 
amount which shall be considered an ``amount held by an insurer'' in the 
case of proceeds of life insurance which are paid subsequent to the 
transfer of the policy for a valuable consideration.
    (4) Effective date. The provisions of this paragraph are applicable 
only with respect to amounts received during taxable years beginning 
after October 28, 1961, irrespective of the date of the death of the 
insured.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6577, 26 FR 
10127, Oct. 28, 1961; 26 FR 10275, Nov. 2, 1961]