What does the 115 and 101 Rule pertain to regarding life insurance policies?

The 115 and 101 Rule pertains specifically to the tax treatment of death benefits related to life insurance policies. These rules outline how death benefits are generally received without being subject to income tax, provided that certain conditions are met.

The 101 Rule states that the death benefit received by the beneficiaries of a life insurance policy is typically exempt from federal income tax. This means that when a policyholder passes away, the beneficiaries can receive the full amount of the life insurance benefit without incurring income tax liability.

The 115 Rule includes provisions that relate to scenarios where a policy is transferred for value, potentially altering the tax treatment of the death benefit under certain circumstances. This rule emphasizes the importance of ownership and the nature of policy transfers in determining tax implications.

Understanding these rules is crucial for both policyholders and beneficiaries, helping them to navigate the tax benefits that life insurance can offer, making it a significant aspect of financial and estate planning.