Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 69-54

1969-1 C.B. 221

IRS Headnote

Revenue Ruling 68-334 relating to the application of section 2042 of the Code to amounts received as life insurance under a group term life insurance contract is restated and superseded.

Full Text

Rev. Rul. 69-54

The last sentence of Revenue Ruling 68-334, C.B. 1968-1, 403, reads as follows:

"Under the circumstances, the assignee's right to the amount of the group term coverage could not have been defeated by any action solely within the control of the assignor. (Emphasis added.)"

The word "solely" as used in that Revenue Ruling was not intended to imply that section 2042 of the Internal Revenue Code of 1954 is inapplicable to an incident of ownership which was exercisable only in conjunction with another person.

The word "solely" has been deleted and that Revenue Ruling is restated below:

Advice has been requested whether the value of the amount received under a group term life insurance policy is includible in an employee's gross estate for Federal estate tax purposes under each of the situations discussed herein.

Section 2042 of the Internal Revenue Code of 1954 provides, in part, as follows:

"The value of the gross estate shall include the value of all property--

* * * * *

"(2) Receivable by other beneficiaries.--To the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person. * * *"

Section 20.2042-1(c)(2) of the Estate Tax Regulations provides, in part, as follows:

"* * *, the term "incidents of ownership" is not limited in its meaning to ownership of the policy in the technical legal sense. * * *. Thus, it includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc. * * *."

In determining whether the decedent possessed an incident of ownership in the policy, consideration must be given to the effect of State or other applicable law. See section 20.2042-1(c)(5) of the regulations. The decedent's rights in the policy are generally determined by local insurance or property laws.

The insurance laws of most States require that an employee have the right to convert his group insurance into individual insurance within a specified time after termination of his employment. The conversion privilege is a safeguard for the insured and cannot be deleted from the policy. Moreover, as a provision required by statute it cannot be waived by mutual consent of the parties to the contract, unsupported by consideration. See Thomas Satery v. Great American Reserve Insurance Co., 278 S.W. 2d 377 (1955).

The application of section 2042 of the Code to amounts received under group term life insurance policies is illustrated by three factual situations, as follows:

Situation 1. The decedent at the time of his death was insured for 50x dollars under a group term life insurance policy wholly paid for by his employer. Neither the group term policy nor State law gives the employee the right to convert his group insurance into individual insurance upon termination of his employment. The policy provides that each employee's coverage ceases upon termination of his employment. The employee makes an irrevocable assignment of his insurance under the group policy.

The value of the proceeds of the policy is includible in the gross estate of the insured employee since he had the power to cancel the insurance by terminating his employment, and any power to effect such a cancellation is an incident of ownership with respect to the policy. See section 20.2042-1(c)(2) of the regulations. It is also evident that the assignee of the policy had no means of preventing a termination of the decedent's employment from causing a loss of such assignee's interest in the policy and thus effectively controlling its ultimate disposition.

Situation 2. The decedent at the time of his death was insured for 50x dollars under a group term life insurance policy wholly paid for by his employer. As required by State law, the employee is granted under the terms of the policy the right to convert his group insurance into individual insurance upon termination of his employment. Both the policy and State law permit absolute assignment of the group insurance including the conversion privilege. The policy provides that coverage under the group policy shall cease upon termination of employment. The employee makes an irrevocable assignment of his insurance under the group policy, but retains the conversion privilege.

The value of the proceeds of the group term life insurance is includible in the gross estate of the insured. The decedent has effectively retained the power to control the disposition of the insurance through an exercise of the conversion privilege upon any termination of his employment and has thus retained an incident of ownership with respect to the policy. If either the group policy or local law prohibits an assignment of the conversion privilege, the same result follows notwithstanding any purported assignment of the conversion privilege.

Situation 3. The facts are similar to those in Situation 2, in that both the group policy and the State law permit the employee to make an absolute assignment of all of his incidents of ownership in the policy. The policy provides that coverage thereunder shall cease upon termination of employment. Upon such termination of the insured's employment, the assignee acting alone could convert to a 50x dollar individual policy. The employee made an irrevocable assignment of all of his incidents of ownership in the policy, including the conversion privilege. The insured could not have effected cancellation of the insurance coverage by terminating his employment. Consequently, the insured decedent did not die possessed of any incidents of ownership in the policy.

No part of the value of the proceeds of the group insurance is includible in the insured's gross estate under section 2042 of the Code. Under the circumstances, the assignee's right to the amount of the group term coverage could not have been defeated by any action within the control of the assignor.

Revenue Ruling 68-334 is hereby superseded.