§ 101. Certain death benefits
(a)
Proceeds of life insurance contracts payable by reason of death
(1)
General rule
Except as otherwise provided in paragraph (2), subsection (d), subsection (f), and subsection (j), gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured.
(2)
Transfer for valuable consideration
In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance contract or any interest therein, the amount excluded from gross income by paragraph (1) shall not exceed an amount equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee. The preceding sentence shall not apply in the case of such a transfer—
(A)
if such contract or interest therein has a basis for determining gain or loss in the hands of a transferee determined in whole or in part by reference to such basis of such contract or interest therein in the hands of the transferor, or
(c)
Interest
If any amount excluded from gross income by subsection (a) is held under an agreement to pay interest thereon, the interest payments shall be included in gross income.
(d)
Payment of life insurance proceeds at a date later than death
(1)
General rule
The amounts held by an insurer with respect to any beneficiary shall be prorated (in accordance with such regulations as may be prescribed by the Secretary) over the period or periods with respect to which such payments are to be made. There shall be excluded from the gross income of such beneficiary in the taxable year received any amount determined by such proration. Gross income includes, to the extent not excluded by the preceding sentence, amounts received under agreements to which this subsection applies.
(2)
Amount held by an insurer
An amount held by an insurer with respect to any beneficiary shall mean an amount to which subsection (a) applies which is—
(A)
held by any insurer under an agreement provided for in the life insurance contract, whether as an option or otherwise, to pay such amount on a date or dates later than the death of the insured, and
(f)
Proceeds of flexible premium contracts issued before January 1, 1985 payable by reason of death
(1)
In general
Any amount paid by reason of the death of the insured under a flexible premium life insurance contract issued before January 1, 1985 shall be excluded from gross income only if—
(2)
Guideline premium limitation
For purposes of this subsection—
(A)
Guideline premium limitation
The term “guideline premium limitation” means, as of any date, the greater of—
(B)
Guideline single premium
The term “guideline single premium” means the premium at issue with respect to future benefits under the contract (without regard to any qualified additional benefit), and with respect to any charges for qualified additional benefits, at the time of a determination under subparagraph (A) or (E) and which is based on—
(C)
Guideline level premium
The term “guideline level premium” means the level annual amount, payable over the longest period permitted under the contract (but ending not less than 20 years from date of issue or not later than age 95, if earlier), computed on the same basis as the guideline single premium, except that subparagraph (B)(ii) shall be applied by substituting “4 percent” for “6 percent”.
(D)
Computational rules
In computing the guideline single premium or guideline level premium under subparagraph (B) or (C)—
(i)
the excess of the amount payable by reason of the death of the insured (determined without regard to any qualified additional benefit) over the cash value of the contract shall be deemed to be not greater than such excess at the time the contract was issued,
(E)
Adjustments
The guideline single premium and guideline level premium shall be adjusted in the event of a change in the future benefits or any qualified additional benefit under the contract which was not reflected in any guideline single premiums or guideline level premium previously determined.
(3)
Other definitions and special rules
For purposes of this subsection—
(A)
Flexible premium life insurance contract
The terms “flexible premium life insurance contract” and “contract” mean a life insurance contract (including any qualified additional benefits) which provides for the payment of one or more premiums which are not fixed by the insurer as to both timing and amount. Such terms do not include that portion of any contract which is treated under State law as providing any annuity benefits other than as a settlement option.
(B)
Premiums paid
The term “premiums paid” means the premiums paid under the contract less any amounts (other than amounts includible in gross income) to which section
72
(e) applies. If, in order to comply with the requirements of paragraph (1)(A), any portion of any premium paid during any contract year is returned by the insurance company (with interest) within 60 days after the end of a contract year—
(C)
Applicable percentage
The term “applicable percentage” means—
(D)
Cash value
The cash value of any contract shall be determined without regard to any deduction for any surrender charge or policy loan.
(F)
Premium payments not disqualifying contract
The payment of a premium which would result in the sum of the premiums paid exceeding the guideline premium limitation shall be disregarded for purposes of paragraph (1)(A)(i) if the amount of such premium does not exceed the amount necessary to prevent the termination of the contract without cash value on or before the end of the contract year.
(G)
Net single premium
In computing the net single premium under paragraph (1)(B)—
(i)
the mortality basis shall be that guaranteed under the contract (determined by reference to the most recent mortality table allowed under all State laws on the date of issuance),
(g)
Treatment of certain accelerated death benefits
(1)
In general
For purposes of this section, the following amounts shall be treated as an amount paid by reason of the death of an insured:
(2)
Treatment of viatical settlements
(A)
In general
If any portion of the death benefit under a life insurance contract on the life of an insured described in paragraph (1) is sold or assigned to a viatical settlement provider, the amount paid for the sale or assignment of such portion shall be treated as an amount paid under the life insurance contract by reason of the death of such insured.
(B)
Viatical settlement provider
(i)
In general
The term “viatical settlement provider” means any person regularly engaged in the trade or business of purchasing, or taking assignments of, life insurance contracts on the lives of insureds described in paragraph (1) if—
(ii)
Terminally ill insureds
A person meets the requirements of this clause with respect to an insured who is a terminally ill individual if such person—
(3)
Special rules for chronically ill insureds
In the case of an insured who is a chronically ill individual—
(A)
In general
Paragraphs (1) and (2) shall not apply to any payment received for any period unless—
(B)
Other requirements
The requirements applicable under this subparagraph are—
(i)
those requirements of section
7702B
(g) and section
4980C which the Secretary specifies as applying to such a purchase, assignment, or other arrangement,
(4)
Definitions
For purposes of this subsection—
(A)
Terminally ill individual
The term “terminally ill individual” means an individual who has been certified by a physician as having an illness or physical condition which can reasonably be expected to result in death in 24 months or less after the date of the certification.
(5)
Exception for business-related policies
This subsection shall not apply in the case of any amount paid to any taxpayer other than the insured if such taxpayer has an insurable interest with respect to the life of the insured by reason of the insured being a director, officer, or employee of the taxpayer or by reason of the insured being financially interested in any trade or business carried on by the taxpayer.
(h)
Survivor benefits attributable to service by a public safety officer who is killed in the line of duty
(1)
In general
Gross income shall not include any amount paid as a survivor annuity on account of the death of a public safety officer (as such term is defined in section 1204 of the Omnibus Crime Control and Safe Streets Act of 1968) killed in the line of duty—
(2)
Exceptions
Paragraph (1) shall not apply with respect to the death of any public safety officer if, as determined in accordance with the provisions of the Omnibus Crime Control and Safe Streets Act of 1968—
(A)
the death was caused by the intentional misconduct of the officer or by such officer’s intention to bring about such officer’s death;
(B)
the officer was voluntarily intoxicated (as defined in section 1204 of such Act) at the time of death;
(i)
Certain employee death benefits payable by reason of death of certain terrorist victims or astronauts
(2)
Limitation
(j)
Treatment of certain employer-owned life insurance contracts
(1)
General rule
In the case of an employer-owned life insurance contract, the amount excluded from gross income of an applicable policyholder by reason of paragraph (1) of subsection (a) shall not exceed an amount equal to the sum of the premiums and other amounts paid by the policyholder for the contract.
(2)
Exceptions
In the case of an employer-owned life insurance contract with respect to which the notice and consent requirements of paragraph (4) are met, paragraph (1) shall not apply to any of the following:
(A)
Exceptions based on insured’s status
Any amount received by reason of the death of an insured who, with respect to an applicable policyholder—
(B)
Exception for amounts paid to insured’s heirs
Any amount received by reason of the death of an insured to the extent—
(i)
the amount is paid to a member of the family (within the meaning of section 267(c)(4)) of the insured, any individual who is the designated beneficiary of the insured under the contract (other than the applicable policyholder), a trust established for the benefit of any such member of the family or designated beneficiary, or the estate of the insured, or
(3)
Employer-owned life insurance contract
(A)
In general
For purposes of this subsection, the term “employer-owned life insurance contract” means a life insurance contract which—
(i)
is owned by a person engaged in a trade or business and under which such person (or a related person described in subparagraph (B)(ii)) is directly or indirectly a beneficiary under the contract, and
(B)
Applicable policyholder
For purposes of this subsection—
(i)
In general
The term “applicable policyholder” means, with respect to any employer-owned life insurance contract, the person described in subparagraph (A)(i) which owns the contract.
(ii)
Related persons
The term “applicable policyholder” includes any person which—
(I)
bears a relationship to the person described in clause (i) which is specified in section
267
(b) or
707
(b)(1), or
(II)
is engaged in trades or businesses with such person which are under common control (within the meaning of subsection (a) or (b) of section
52).
(4)
Notice and consent requirements
The notice and consent requirements of this paragraph are met if, before the issuance of the contract, the employee—
(A)
is notified in writing that the applicable policyholder intends to insure the employee’s life and the maximum face amount for which the employee could be insured at the time the contract was issued,
(5)
Definitions
For purposes of this subsection—
(B)
Insured
The term “insured” means, with respect to an employer-owned life insurance contract, an individual covered by the contract who is a United States citizen or resident. In the case of a contract covering the joint lives of 2 individuals, references to an insured include both of the individuals.