To illustrate how the adjusted basis is calculated for determining gain or loss on the sale of a life insurance policy, as per Rev. Rul. 2009-13, we can refer to two distinct situations detailed within the ruling:
Situation 2:
In this scenario, the taxpayer, referred to as A, had paid total premiums amounting to $64,000 on a life insurance contract. Before the sale of this contract, $10,000 was deducted from the contract's cash surrender value as cost-of-insurance charges. Therefore, A's adjusted basis in the contract at the time of sale was calculated as $54,000, which is the total premiums paid ($64,000) minus the cost of insurance charges ($10,000). When A sold the contract for $80,000, the gain recognized on the sale was determined to be $26,000, calculated as the amount realized from the sale ($80,000) minus A's adjusted basis in the contract ($54,000).
Situation 3:
In this situation, A owned a term life insurance contract with no cash surrender value. The monthly premium for this contract was $500, and A held the contract for 89.5 months, resulting in total premiums paid of $45,000 up to the date of sale. A sold the contract for $20,000. The cost of insurance, presumed to equal the monthly premiums under the contract, amounted to $44,750 ($500 times 89.5 months). Consequently, A's adjusted basis in the contract at the time of sale was calculated as $250, which is the total premiums paid ($45,000) minus the cost of insurance protection ($44,750). A must recognize a gain of $19,750 on the sale of the term life insurance contract to B, calculated as the amount realized from the sale ($20,000) minus the adjusted basis of the contract ($250).
These examples from Rev. Rul. 2009-13 demonstrate the process of calculating the adjusted basis for determining gain or loss on the sale of a life insurance policy. The adjusted basis is generally the cost of the property (in this case, the total premiums paid for the life insurance contract) adjusted as provided under sections 1011 and 1012 of the Internal Revenue Code, and further adjusted for expenditures, receipts, losses, or other items properly chargeable to capital account, including the cost of insurance charges before the sale.
Sources:
Rev. Rul. 76-111
Rev. Rul. 90-109
Rev. Rul. 55-119
Rev. Rul. 2009-13
Rev. Rul. 2020-5
Rev. Rul. 2009-14
