26 U.S.C. § 101: Certain death benefits

Except as otherwise provided in paragraphs (2) and (3), 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. 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 if such transfer is to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a corporation in which the insured is a shareholder or officer. The second sentence of paragraph (2) shall not apply in the case of a transfer of a life insurance contract, or any interest therein, which is a reportable policy sale. For purposes of this paragraph, the term “reportable policy sale” means the acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured apart from the acquirer’s interest in such life insurance contract. For purposes of the preceding sentence, the term “indirectly” applies to the acquisition of an interest in a partnership, trust, or other entity that holds an interest in the life insurance contract. 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. 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. 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 as of the date of death of the insured (as if any option exercised under the life insurance contract were exercised at such time), and as discounted on the basis of the interest rate used by the insurer in calculating payments under the agreement and mortality tables prescribed by the Secretary. This subsection shall not apply to any amount to which subsection (c) is applicable. the sum of the premiums paid under such contract does not at any time exceed the guideline premium limitation as of such time, and any amount payable by reason of the death of the insured (determined without regard to any qualified additional benefit) is not at any time less than the applicable percentage of the cash value of such contract at such time, or by the terms of such contract, the cash value of such contract may not at any time exceed the net single premium with respect to the amount payable by reason of the death of the insured (determined without regard to any qualified additional benefit) at such time. the guideline single premium, or the sum of the guideline level premiums to such date. the mortality and other charges guaranteed under the contract, and interest at the greater of an annual effective rate of 6 percent or the minimum rate or rates guaranteed upon issue of the contract. 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”. 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, the maturity date shall be the latest maturity date permitted under the contract, but not less than 20 years after the date of issue or (if earlier) age 95, and the amount of any endowment benefit (or sum of endowment benefits) shall be deemed not to exceed the least amount payable by reason of the death of the insured (determined without regard to any qualified additional benefit) at any time under the contract. 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. 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. the amount so returned (excluding interest) shall be deemed to reduce the sum of the premiums paid under the contract during such year, and notwithstanding the provisions of section 72(e), the amount of any interest so returned shall be includible in the gross income of the recipient. 140 percent in the case of an insured with an attained age at the beginning of the contract year of 40 or less, and in the case of an insured with an attained age of more than 40 as of the beginning of the contract year, 140 percent reduced (but not below 105 percent) by one percent for each year in excess of 40. The cash value of any contract shall be determined without regard to any deduction for any surrender charge or policy loan. guaranteed insurability, accidental death benefit, family term coverage, or waiver of premium. 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. 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), an annual effective rate of 4 percent (3 percent for contracts issued before July 1, 1983 ), or the minimum rate or rates guaranteed upon issue of the contract, and the computational rules of paragraph (2)(D) shall apply, except that the maturity date referred to in clause (ii) thereof shall not be earlier than age 95. the requirements described in paragraph (1) for any contract year was not satisfied due to reasonable error, and reasonable steps are being taken to remedy the error, The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection. Any amount received under a life insurance contract on the life of an insured who is a terminally ill individual. Any amount received under a life insurance contract on the life of an insured who is a chronically ill individual. 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. such person is licensed for such purposes (with respect to insureds described in the same subparagraph of paragraph (1) as the insured) in the State in which the insured resides, or in the case of an insured who resides in a State not requiring the licensing of such persons for such purposes with respect to such insured, such person meets the requirements of clause (ii) or (iii), whichever applies to such insured. meets the requirements of sections 8 and 9 of the Viatical Settlements Model Act of the National Association of Insurance Commissioners, and meets the requirements of the Model Regulations of the National Association of Insurance Commissioners (relating to standards for evaluation of reasonable payments) in determining amounts paid by such person in connection with such purchases or assignments. meets requirements similar to the requirements referred to in clause (ii)(I), and meets the standards (if any) of the National Association of Insurance Commissioners for evaluating the reasonableness of amounts paid by such person in connection with such purchases or assignments with respect to chronically ill individuals. such payment is for costs incurred by the payee (not compensated for by insurance or otherwise) for qualified long-term care services provided for the insured for such period, and the requirements of section 7702B(b)(1)(B), and the requirements (if any) applicable under subparagraph (B). those requirements of section 7702B(g) and section 4980C which the Secretary specifies as applying to such a purchase, assignment, or other arrangement, standards adopted by the National Association of Insurance Commissioners which specifically apply to chronically ill individuals (and, if such standards are adopted, the analogous requirements specified under clause (i) shall cease to apply), and standards adopted by the State in which the policyholder resides (and if such standards are adopted, the analogous requirements specified under clause (i) and (subject to section 4980C(f)) standards under clause (ii), shall cease to apply). A payment shall not fail to be described in subparagraph (A) by reason of being made on a per diem or other periodic basis without regard to the expenses incurred during the period to which the payment relates. For limitation on amount of periodic payments which are treated as described in paragraph (1), see section 7702B(d). 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. The term “chronically ill individual” has the meaning given such term by section 7702B(c)(2); except that such term shall not include a terminally ill individual. The term “qualified long-term care services” has the meaning given such term by section 7702B(c). The term “physician” has the meaning given to such term by section 1861(r)(1) of the Social Security Act ( 42 U.S.C. 1395x(r)(1) ). 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. if such annuity is provided, under a governmental plan which meets the requirements of section 401(a), to the spouse (or a former spouse) of the public safety officer or to a child of such officer; and to the extent such annuity is attributable to such officer’s service as a public safety officer. the death was caused by the intentional misconduct of the officer or by such officer’s intention to bring about such officer’s death; the officer was voluntarily intoxicated (as defined in section 1204 of such Act) at the time of death; the officer was performing such officer’s duties in a grossly negligent manner at the time of death; or the payment is to an individual whose actions were a substantial contributing factor to the death of the officer. Gross income does not include amounts (whether in a single sum or otherwise) paid by an employer by reason of the death of an employee who is a specified terrorist victim (as defined in section 692(d)(4)). Subject to such rules as the Secretary may prescribe, paragraph (1) shall not apply to amounts which would have been payable after death if the individual had died other than as a specified terrorist victim (as so defined). Subparagraph (A) shall not apply to incidental death benefits paid from a plan described in section 401(a) and exempt from tax under section 501(a). For purposes of paragraph (1), the term “employee” includes a self-employed individual (as defined in section 401(c)(1)). The provisions of this subsection shall apply to any astronaut whose death occurs in the line of duty. 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. was an employee at any time during the 12-month period before the insured’s death, or a director, a highly compensated employee within the meaning of section 414(q) (without regard to paragraph (1)(B)(ii) thereof), or a highly compensated individual within the meaning of section 105(h)(5), except that “35 percent” shall be substituted for “25 percent” in subparagraph (C) thereof. 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 the amount is used to purchase an equity (or capital or profits) interest in the applicable policyholder from any person described in clause (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 covers the life of an insured who is an employee with respect to the trade or business of the applicable policyholder on the date the contract is issued. 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. bears a relationship to the person described in clause (i) which is specified in section 267(b) or 707(b)(1), or 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). 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, provides written consent to being insured under the contract and that such coverage may continue after the insured terminates employment, and is informed in writing that an applicable policyholder will be a beneficiary of any proceeds payable upon the death of the employee. The term “employee” includes an officer, director, and highly compensated employee (within the meaning of section 414(q)). 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. The amendment made by this section [amending this section] shall apply to taxable years ending before, on, or after September 11, 2001 . If refund or credit of any overpayment of tax resulting from the amendments made by this section is prevented at any time before the close of the 1-year period beginning on the date of the enactment of this Act [ Jan. 23, 2002 ] by the operation of any law or rule of law (including res judicata), such refund or credit may nevertheless be made or allowed if claim therefor is filed before the close of such period.” Any contract entered into before January 1, 1983 , which meets the requirements of section 101(f) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] on the date which is 1 year after the date of the enactment of this Act [ Sept. 3, 1982 ] shall be treated as meeting the requirements of such section for any period before the date on which such contract meets such requirements. Any death benefits paid under a flexible premium life insurance contract (within the meaning of section 101(f)(3)(A) of such Code) before the date which is 1 year after such date of enactment [ Sept. 3, 1982 ] shall be excluded from gross income. Any contract entered into before January 1, 1983 , shall be treated as meeting the requirements of subparagraph (A) of section 101(f)(1) of such Code if such contract would meet such requirements if section 101(f)(2)(C) of such Code were applied by substituting ‘3 percent’ for ‘4 percent’.”