Form 1099-SB: Seller's Investment in Life Insurance Contract — A Complete Guide for 2024
When you sell your life insurance policy to someone other than family or through a life settlement, the IRS wants to keep track of what you originally put into that policy. That's where Form 1099-SB comes in—a tax document that helps you and the IRS calculate whether you owe taxes on the sale. Think of it as a receipt showing your "basis" in the policy, similar to knowing what you originally paid for a house before selling it.
What Form 1099-SB Is For
Form 1099-SB, officially titled "Seller's Investment in Life Insurance Contract," is an information return that reports how much you invested in a life insurance policy when you sell or transfer it in what's called a "reportable policy sale." The life insurance company (the issuer) sends this form to both you and the IRS to document your investment basis in the contract.
A reportable policy sale typically occurs when you sell your life insurance policy to a third party—such as a life settlement company—that doesn't have a substantial family, business, or financial relationship with the insured person. For example, if you're terminally ill and decide to sell your policy to a life settlement broker for immediate cash, that transaction triggers Form 1099-SB reporting. The form is also issued if you transfer ownership of your policy to a foreign person.
The form contains two critical pieces of information: Box 1 shows your investment in the contract (essentially what you paid in premiums minus any amounts you previously withdrew tax-free), and Box 2 shows the surrender amount (what you would have received if you had cashed in the policy with the insurance company on the sale date instead of selling it to a third party). These figures help you determine your taxable gain or loss when you file your tax return. IRS.gov
When You’d Use Form 1099-SB (Late/Amended)
Standard Timeline
Life insurance companies must furnish Form 1099-SB to sellers by February 18, 2025 for transactions occurring during 2024 (though there's a special exception if the company receives notice of a transfer to a foreign person after January 31). The company must file the form with the IRS by February 28, 2025 if filing on paper, or March 31, 2025 if filing electronically. IRS General Instructions
Late Filing Situations
If you're the policy seller (recipient), you don't file Form 1099-SB yourself—the insurance company does. However, if you haven't received your copy by mid-February and you sold your policy in 2024, contact the insurance company immediately. They may need to issue a late form, which could delay your tax filing.
Amended/Corrected Forms
The insurance company must issue a corrected Form 1099-SB if the original contained errors or if the transaction is rescinded (cancelled). Under IRS regulations, if a reportable policy sale is rescinded, the issuer must file a corrected Form 1099-SB within 15 calendar days of receiving notice of the rescission. Similarly, they must furnish you with a corrected statement within 15 days. IRS Instructions for Form 1099-SB
If you receive a corrected 1099-SB after you've already filed your tax return, you may need to file an amended return (Form 1040-X) to correct your originally reported income. This is particularly important because the corrected amounts could significantly change your tax liability.
Key Rules or Details for 2024
Reporting Threshold
Unlike many other 1099 forms that have minimum dollar thresholds, Form 1099-SB must be filed whenever there's a reportable policy sale, regardless of the amount—even if Box 1 or Box 2 shows just $1 or more.
Who Must File
Only the life insurance company (issuer) files Form 1099-SB—not the policy seller or buyer. The issuer includes any company that bears risk under the contract or is responsible for administering it (collecting premiums, paying death benefits). An issuer's designee can also file on their behalf. The issuer must file when they receive a Form 1099-LS (Reportable Life Insurance Sale) from the acquirer or receive notice that the policy was transferred to a foreign person. IRS Form 1099-SB Instructions
Electronic Filing Mandate
Beginning with tax year 2024, businesses filing 10 or more information returns (including all types of 1099 forms combined) must file electronically. This threshold was lowered from 250 returns to make e-filing nearly universal.
Investment in Contract Calculation
For the original policyholder, the investment in contract is straightforward: total premiums paid minus any tax-free distributions received. However, if you purchased the policy from someone else, the issuer may only estimate your investment based on what they know. The issuer reports their best estimate of what you paid into the policy during your ownership, minus any withdrawals you took.
Foreign Transfer Reporting
If you transfer your life insurance policy to a foreign person (someone who is not a U.S. person), the issuer must file Form 1099-SB even if it's not technically a "sale." Notice of a foreign transfer includes any information the issuer receives showing foreign indicia—such as a foreign address, foreign phone number, or foreign identification.
Step-by-Step (High Level)
Step 1: The Transaction Occurs
You sell your life insurance policy to a third party (acquirer) through a life settlement or similar arrangement. The acquirer could be an individual investor, life settlement company, or viatical settlement provider. This sale is separate from surrendering the policy back to the insurance company.
Step 2: The Acquirer Notifies the Insurer
The buyer (acquirer) is required to file Form 1099-LS with the IRS and send a copy to the insurance company. This form reports the transaction details and triggers the insurance company's obligation to file Form 1099-SB about your investment basis.
Step 3: The Insurer Calculates Your Investment
Once notified, the insurance company determines your investment in the contract (what you paid in premiums minus tax-free withdrawals) and the surrender amount (what you would have received if you'd surrendered the policy on the sale date).
Step 4: You Receive Form 1099-SB
By mid-February following the tax year of the sale, the insurance company must provide you with Form 1099-SB showing these amounts. You should receive this along with any other tax documents.
Step 5: You Report on Your Tax Return
Using the information from Form 1099-SB along with the actual sale proceeds (which you should know from your transaction documents), you calculate your gain or loss. Generally, you report this as a capital gain on Schedule D and Form 8949 of your tax return. Your gain is the sale proceeds minus your investment in the contract (Box 1). The transaction is typically treated as a sale of a capital asset.
Step 6: The IRS Cross-Checks
The IRS receives matching copies of your Form 1099-SB, Form 1099-LS (from the buyer), and your tax return. They verify that you've properly reported the transaction.
Common Mistakes and How to Avoid Them
Mistake #1: Ignoring the Form
Some taxpayers assume that because they didn't receive cash directly equal to the amounts shown on Form 1099-SB, they don't need to report anything. This is wrong. Form 1099-SB provides baseline information for calculating your gain or loss, but you must still report the transaction on your return using the actual sale proceeds you received.
How to Avoid: Always report transactions when you receive a 1099 form, even if you believe no tax is owed. Use Form 1099-SB as a starting point, not the complete picture.
Mistake #2: Confusing Investment Amount with Sale Proceeds
Box 1 on Form 1099-SB shows your investment in the contract (your basis), not what you received from the sale. The actual sale proceeds come from your transaction documents with the buyer. Some taxpayers mistakenly think Box 1 or Box 2 represents their taxable income.
How to Avoid: Understand that Form 1099-SB helps you calculate gain or loss by providing your basis. Your taxable gain equals: Sale Proceeds (what you actually received) minus Box 1 (your investment in the contract).
Mistake #3: Failing to Keep Transaction Records
You'll need documentation beyond Form 1099-SB to complete your tax return, including the settlement statement showing actual proceeds, any fees paid, and the closing documents from your life settlement transaction.
How to Avoid: Create a tax folder when you sell your policy and save all transaction documents, correspondence, and settlement statements. You'll need these to accurately calculate and substantiate your reported gain or loss.
Mistake #4: Missing Corrected Forms
Corrected 1099-SB forms can arrive months after you've filed your tax return, especially if the transaction is rescinded or initial calculations were incorrect. Ignoring corrected forms can result in IRS matching notices and potential penalties. IRS Instructions
How to Avoid: Check your mailbox and email through April and May following the tax year. If you receive a corrected 1099-SB and you've already filed, consult a tax professional about whether you need to file an amended return.
Mistake #5: Incorrect Reporting Category
Some taxpayers report life insurance policy sales as ordinary income (on Form 1040 line 8) rather than as capital gains on Schedule D. This could result in paying tax at higher ordinary income rates instead of potentially lower capital gains rates.
How to Avoid: Generally, life insurance policy sales should be reported as capital asset sales on Schedule D and Form 8949. The character of gain (long-term or short-term) depends on how long you owned the policy. Consult IRS Publication 525 or a tax professional for complex situations.
What Happens After You File
IRS Matching Process
After you file your tax return, the IRS's computer systems automatically match your reported transactions against the 1099-SB forms they received from insurance companies. This matching typically occurs several months after you file, usually during the summer and fall.
If Everything Matches
If you properly reported the transaction and the information matches what the IRS has on file, you'll hear nothing further about this item. The transaction is considered resolved.
If There's a Discrepancy
If the IRS detects a mismatch—for example, they received a Form 1099-SB but you didn't report the transaction, or the amounts don't reconcile—you'll typically receive a CP2000 notice (Proposed Changes to Your Tax Return) several months later. This notice proposes additional tax based on the unreported or under-reported income. You have the right to respond, provide explanation, and submit documentation supporting your position.
Penalties for Issuers
While you as the seller don't face direct penalties related to Form 1099-SB filing, the insurance company can face significant penalties for late filing, failure to file, or incorrect information. Penalties under IRC Section 6721 and 6722 range from $60 to $330 per form depending on how late the filing is, with higher penalties for intentional disregard. IRS Penalty Information
State Tax Reporting
Don't forget that many states also require you to report life insurance policy sales on your state income tax return. Some states conform to federal tax treatment, while others have different rules. Check your state's Department of Revenue guidance or consult a local tax professional.
Record Retention
Keep your Form 1099-SB, all transaction documents, and your filed tax return for at least three years from the filing date (or longer if required by other tax situations). You may need these records if the IRS questions your reporting or if you need to file an amended return.
FAQs
Q1: I received both Form 1099-LS and Form 1099-SB for the same transaction. Do I need both?
Yes, these forms serve different purposes. Form 1099-LS is filed by the buyer (acquirer) and reports the payment they made to you for the policy. Form 1099-SB is filed by the insurance company and reports your investment basis in the contract. You need both forms to accurately calculate your taxable gain: Sale proceeds (from 1099-LS) minus investment in contract (from 1099-SB Box 1) equals your taxable gain or loss.
Q2: What if the investment amount shown on Form 1099-SB seems wrong?
Contact the insurance company immediately if you believe Box 1 (Investment in Contract) is incorrect. You may have premium records or documentation they don't have in their systems. The issuer must file a corrected form if they agree there's an error. Keep in mind that if you purchased the policy from someone else rather than being the original policyholder, the amount shown may be an estimate based on limited information available to the insurer. IRS Form 1099-SB Instructions
Q3: I sold my life insurance policy to a family member. Will I receive Form 1099-SB?
Probably not. Sales to family members typically don't qualify as "reportable policy sales" because there is a substantial family relationship between the seller and the acquirer. Form 1099-SB is generally required only when you sell to someone without a substantial family, business, or financial relationship with the insured person—such as a life settlement company or investor. However, you may still need to report the transaction on your tax return even if you don't receive a 1099-SB.
Q4: Do I owe taxes on the amounts shown in Box 1 or Box 2?
No, the amounts in Box 1 and Box 2 are informational only—they're not your taxable income. Box 1 helps you calculate your gain by showing your basis (investment). Box 2 shows what you would have received from the insurance company if you'd surrendered rather than sold the policy. Your taxable gain equals the actual sale proceeds you received minus Box 1 (your investment in the contract).
Q5: What if I never receive Form 1099-SB after selling my policy?
Contact the insurance company first to request your copy. If they confirm a Form 1099-SB should have been issued, ask them to send a duplicate. You're still required to report the sale on your tax return even if you don't receive the form. Use your transaction records, premium payment history, and policy statements to calculate your investment in the contract as accurately as possible. Consider consulting a tax professional if significant amounts are involved.
Q6: Can I deduct transaction costs like broker fees from my gain?
Yes, generally you can reduce your gain by subtracting legitimate transaction expenses such as broker commissions, legal fees, and other costs directly related to the sale. These expenses increase your adjusted basis or reduce your proceeds, depending on the nature of the expense. Keep all receipts and documentation for these expenses as they're deductible against your gain.
Q7: Where exactly do I report this on my tax return?
Life insurance policy sales are typically reported on Form 8949 (Sales and Other Dispositions of Capital Assets) and Schedule D (Capital Gains and Losses). On Form 8949, you'll describe the property as "Life Insurance Policy," enter your proceeds from the sale, your cost basis (from Form 1099-SB Box 1), and calculate your gain or loss. This then flows to Schedule D and ultimately to Form 1040. Tax software can guide you through this process, or consult a tax professional for complex situations.
Sources: All information drawn from official IRS publications including Form 1099-SB Instructions, About Form 1099-SB, General Instructions for Certain Information Returns, and IRS regulations sections 1.6050Y-1 and 1.6050Y-3.
Note: This guide provides general information based on IRS regulations current for the 2024 tax year. Individual tax situations vary significantly, and life insurance policy sales can involve complex tax issues. For personalized advice, consult a qualified tax professional or enrolled agent familiar with life settlement transactions.
