42 / What are the tax results if a life insurance policy is sold subject to a nonrecourse loan?

If a contract sold is subject to a nonrecourse loan, the transferor’s obligation under the loan is discharged and the amount of the loan is considered an amount received on the transfer.¹

For the treatment of amounts received from a viatical settlement provider, see Q 57.

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Planning Point: A life insurance policy may be exchanged for an annuity tax-free under IRC Section 1035, after which the resulting annuity must have the same basis as the original life insurance policy. See Q 44. The rules for recognizing a loss on the surrender of an annuity in a loss position are more liberal than those governing life insurance. See Q 566.

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