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UNITED STATES CODE — TITLE 26 (INTERNAL REVENUE CODE)
SUBTITLE A — INCOME TAXES | CHAPTER 1 — NORMAL TAXES AND SURTAXES
SUBCHAPTER B — COMPUTATION OF TAXABLE INCOME | PART III — ITEMS EXCLUDED FROM GROSS INCOME
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SECTION 101: Certain death benefits.

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(a) PROCEEDS OF LIFE INSURANCE CONTRACTS PAYABLE BY REASON OF DEATH.—

    (1) GENERAL RULE.—Except as otherwise provided in paragraph (2), subsection (d), 
        and subsection (f), 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.

    (2) TRANSFERS FOR VALUABLE CONSIDERATION.—
        In the case of a transfer for a valuable consideration, by assignment 
        or otherwise, of a life insurance contract or any interest therein, the 
        amount excluded from gross income under paragraph (1) shall not exceed 
        an amount equal to the sum of the actual value of such consideration 
        and the premiums and other amounts subsequently paid by the transferee.

        EXCEPTIONS TO TRANSFER FOR VALUE RULE.—Paragraph (2) shall not apply if:
            (A) the contract has a basis in the hands of a transferee determined 
                by reference to its basis in the hands of the transferor, or
            (B) the transfer is to the insured, a partner of the insured, a 
                partnership in which the insured is a partner, or a corporation 
                in which the insured is a shareholder or officer.

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APPLICATION TO PRIVATE PLACEMENT LIFE INSURANCE (PPLI):
Under IRC §101(a)(1), the death benefit proceeds paid to beneficiaries from a 
qualifying PPLI policy pass 100% free of federal income tax, regardless of the 
amount of accumulated tax-deferred growth inside the policy separate account.
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