How to Report Life Insurance Proceeds Transfer for Value

A transfer for value has significant tax implications that require reporting.

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The death benefit that a life insurance policy pays out is typically tax-exempt. The U.S. tax code provides a specific exemption for the proceeds from life insurance. But it also carries an exception to that privileged status. Selling the ownership of your policy has tax implications for both you and the buyer. You might have to report income from the sale, and the buyer might lose the tax-free status of the eventual proceeds.

Transfer for Value

Your life insurance policy is valuable. It promises a payout when you die. Some types of coverage can last long enough that they are certain to pay out, which can offer a guaranteed payout for someone willing to buy it. An investor might offer you a lump sum payment in exchange for ownership of your policy. The payment could be cash, property or anything of value. When you agree to transfer the policy, you’ll have to report to both the insurance company and the Internal Revenue Service.

Seller's Tax Reporting

If you sell ownership or an interest in your life insurance contract, you’ll have to report it on your taxes. The transaction could be a disposition of a capital asset, which means you’ll be filing a Schedule D and Form 8949 as part of your tax return. To qualify, the buyer has to base the price on the face value of the policy. You must describe the policy, when you purchased it, when you sold it, how much you sold it for and the net premiums you paid for it. When the buyer bases the price on the amount of premium you’ve paid or cash value in the policy, you’ll have to report the gain as ordinary income.

Buyer's Tax Reporting

The buyer might not have any reporting requirement at the time of transfer. Brokers and barter exchanges must file Form 1099-B reporting a transfer for value they arranged between a buyer and seller. A copy goes to the seller and the IRS. When the insurance contract pays out, the buyer will have to report it. The most the buyer can exclude from taxable income is the amount he paid for your policy and any subsequent amount he paid. The excess of the proceeds over the excludable portion will either be capital gains or ordinary income based on how it was taxable to you.

Reporting to Company

The life insurance company keeps records of changes in ownership, payers and beneficiaries for all of its contracts. Your buyer will likely require you to make an absolute assignment as a condition of the sale. Otherwise you could still exercise control over the policy by getting in touch with the insurer. Transfers for value can also be arranged through side agreements between you and the buyer. Although the buyer doesn’t have the same guarantees, it could still constitute a transfer for value for tax purposes.