One of the key benefits of any kind of life insurance is the tax-free death benefit. However, some speculators began to transfer life insurance policies between parties to reap large tax-free windfalls. To discourage this, Congress declared any life insurance policy transferred for any kind of material consideration may become partially or fully taxable when the death benefit is paid out.
This rule is known as the transfer-for-value rule, and it stands as one of the few exceptions to the general exemption from taxation accorded to all life insurance death benefit proceeds.
