Gifting a Life Insurance Policy: Valuation and the Annual Exclusion

How is a gift of a life insurance policy valued?

A gifted policy is property, valued at the date of the gift (IRC § 2512(a)). Its value is established through the insurer’s sale of that contract or of comparable contracts. For a policy in force for some time with premiums still due, the value may be approximated as the interpolated terminal reserve plus the unearned part of the last premium (Treas. Reg. § 25.2512-6(a)).

The regulation gives the reason for the approximation: for a contract that has been in force for some time and on which further premiums are to be paid, valuation through the sale of comparable contracts “is not readily ascertainable.” It then applies the rules in examples, summarized here.

The regulation’s fourth example works the approximation through. An ordinary life policy with a gross annual premium of $2,811 is given away four months after the last premium due date. The interpolated terminal reserve at the date of the gift is $13,510.33, two-thirds of the premium is $1,874.00, and the value of the gift is $15,384.33. The examples assume a contract with “no accrued dividends or outstanding indebtedness.”

Form 712 and policy loans

The insurer states these figures on Form 712, Life Insurance Statement, which an officer of the company completes. Part II of the form covers a living insured and is filed with Form 709. It has separate lines for the two valuation methods:

• A policy that is not paid up (line 58): the interpolated terminal reserve, plus the proportion of the gross premium paid beyond the date, plus any adjustment for dividends to the credit of the policy.
• A paid-up or single-premium policy (line 59): the cost of a single-premium policy on the insured’s life at the attained age, plus any adjustment for dividends.

Each method then subtracts “outstanding indebtedness against policy” to reach the “net total value of the policy (for gift or estate tax purposes).” A loan outstanding at the gift therefore reduces the reported value on the form.

The Instructions for Form 709 add a caution for single-premium and paid-up policies. In certain situations, for example where the surrender value exceeds the replacement cost, the instructions say the true economic value of the policy will be greater than the amount on line 59, and direct the donor to report the full economic value on Schedule A, citing Rev. Rul. 78-137, 1978-1 C.B. 280.

The income-tax rule for a transfer that is partly for consideration, and so part sale and part gift, is described on the transfer-for-value page.

The annual exclusion

The annual exclusion covers gifts “other than gifts of future interests in property” (IRC § 2503(b)). It is $19,000 per recipient for gifts made in 2026 (Rev. Proc. 2025-32) and $20,000 for gifts made in 2027 (Rev. Proc. 2026-35).

A policy pays in the future, but that does not make an outright gift of it a future interest. The regulation says the term “has no reference to such contractual rights as exist in a bond, note (though bearing no interest until maturity), or in a policy of life insurance, the obligations of which are to be discharged by payments in the future” (Treas. Reg. § 25.2503-3(a)). It adds that a future interest in such a contract “may be created by the limitations contained in a trust or other instrument of transfer used in effecting a gift.”

Premiums the donor pays after the gift are further gifts. An insured who pays a premium on a policy over which he or she has kept no reversionary interest and no power to change the beneficiaries makes a gift “to the extent of the premium paid” (Treas. Reg. § 25.2511-1(h)(8)). The regulation’s example on the exclusion is direct: where all the incidents of ownership in the policy, including the right to surrender it, are vested in the owner, the insured’s payment of premiums “constitutes a gift of a present interest in property” (§ 25.2503-3(c), Example (6)).

The exclusion itself is covered on the annual-exclusion page.

Gifts of a policy to a trust

The same regulation shows the other result. A donor transfers policies on his own life to a trust; at his death the proceeds are to be invested and the income paid to the beneficiary for life. Because the income payments will not begin until after the donor’s death, the transfer is “a gift of a future interest in property against which no exclusion is allowable” (§ 25.2503-3(c), Example (2)).

A withdrawal right held by the trust’s beneficiaries can make the gift a present interest. It is explained on the Crummey powers page, and the notices that support it on the Crummey letters page. Paying premiums through a trust is covered on the ILIT funding page.

Estate tax and income tax after the gift

The three-year estate-tax lookback. A completed gift of a policy does not settle the estate tax at once. If the donor transferred an interest in property during the three-year period ending on the date of death, and its value would have been included in the gross estate under § 2042 had the donor kept it, the gross estate includes the value that would have been so included (IRC § 2035(a)). Section 2042 applies to insurance on the decedent’s own life, so on its terms the lookback reaches a donor who is the insured, and what comes back is measured by the proceeds, not by the gift-tax value. The three-year rule page covers it, and the incidents-of-ownership page covers what the donor must not keep.

The donee’s basis. Property acquired by gift generally takes the basis it had in the donor’s hands (IRC § 1015(a)).

The death benefit in the donee’s hands. To the extent a transfer of a policy is gratuitous, the amount of the proceeds the donee may exclude from income is limited to what the donor could have excluded, plus the premiums and other amounts the donee later paid (Treas. Reg. § 1.101-1(b)(2)(i)). The transfer-for-value page explains that rule and what changes when a policy is sold.

Form 709 reporting

The Instructions for Form 709 for 2025 gifts generally require a return when gifts to one person other than a spouse exceed the annual exclusion, and for a gift of a future interest in any amount. For a policy, the instructions also require:

• in the description of the gift, “the name of the insurer and the policy number”; and
• for each life insurance policy, an attached Form 712.

If the gift was made by means of a trust, the instructions call for a certified or verified copy of the trust instrument with the return that reports the first transfer to the trust. Filing deadlines and the disclosure rules are on the Form 709 page.

A worked example

Hypothetical. In 2026 a parent gives an adult child, outright, a policy on the parent’s own life on which premiums are still due. The insurer’s Form 712 shows an interpolated terminal reserve of $30,000 and $2,000 of premium paid beyond the gift date, with no dividends and no loan. The parent makes no other gifts to the child in 2026 and does not split gifts with a spouse.

• Value of the gift: $30,000 + $2,000 = $32,000.
• 2026 annual exclusion: $19,000.
• Taxable gift: $32,000 − $19,000 = $13,000.

The gift exceeds the 2026 exclusion, so a gift tax return is required (IRC § 6019), and the Form 709 instructions for 2025 gifts call for the Form 712 to be attached. How a taxable gift is absorbed is covered on the lifetime-exemption page. If the parent pays a $4,000 premium on the child’s policy in 2027 and makes no other gifts to the child that year, the payment is a present-interest gift within the $20,000 exclusion for 2027. If the parent dies within three years of the transfer, § 2035(a) applies as described above.

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