What might happen if a non-exempt transferee purchases a life insurance policy?

When a non-exempt transferee purchases a life insurance policy, the tax implications center around the relationship between the cash value of the policy and the purchase amount. Specifically, a non-exempt transferee is someone who buys the policy and does not meet certain exceptions that would allow for favorable tax treatment.

Thus, when the policy is purchased, the buyer may face a tax burden based on the difference between the cash value of the policy at the time of purchase and the amount they paid for it. If the cash value exceeds the purchase price, that difference is considered a gain and is subject to taxation. This scenario is often addressed in tax regulations to prevent tax avoidance by transferring existing policies to non-exempt individuals.

Consequently, this option accurately captures the primary tax consideration involved in the purchase of a life insurance policy by a non-exempt individual, emphasizing the importance of understanding how cash value and purchase amounts interact in terms of tax obligations.