What is meant by the term "transferred for value" in life insurance?

The term "transferred for value" in life insurance refers specifically to the concept that when a policy is sold or transferred, the receiving party may benefit from a cash payout without incurring immediate taxation, provided certain conditions are met. This provision is essential for understanding how the sale of a life insurance policy impacts tax obligations.

For example, if an individual sells a life insurance policy to a third party for cash, the transaction may allow the buyer (or the new policyholder) to receive death benefits tax-free, as long as they are the beneficiaries. This means that the policyholder has essentially transferred the policy for value, which allows the buyer to realize financial gain without the tax implications typically associated with transfers of ownership in policies.

Understanding this term is crucial for anyone involved in life insurance transactions, as it helps clarify the potential benefits and tax consequences of such transfers.