Form 1099-SB: Seller's Investment in Life Insurance Contract – A Complete Guide (2020)

What Form 1099-SB Is For

Form 1099-SB, officially titled "Seller's Investment in Life Insurance Contract," is an information return that life insurance companies must file when someone sells their life insurance policy or transfers it to a foreign person. Think of it as a document that tells you—and the IRS—how much money you originally put into your life insurance policy when you sell it.

The form was created following the enactment of Section 6050Y of the Internal Revenue Code, which established new reporting requirements for life insurance policy sales that took effect after December 31, 2017. When you sell a life insurance policy through what's called a "life settlement" or transfer it to someone who isn't a close family member or business partner, the insurance company that issued your policy must report specific financial information about that transaction.

Here's what makes this form important: When you sell a life insurance policy, you might owe taxes on the money you receive. The amount you'll be taxed on depends on how much you originally invested in the policy (your "cost basis"). Form 1099-SB provides that crucial cost basis information. Box 1 shows your total investment in the contract—essentially all the premiums you paid minus any money you already received tax-free. Box 2 shows the "surrender amount," which is what you would have received if you had cashed in the policy directly with the insurance company instead of selling it.

This form typically comes into play during "reportable policy sales," which occur when someone buys your life insurance policy and they don't have a substantial family, business, or financial relationship with the person whose life is insured. These transactions are most common in the life settlement industry, where investors purchase policies from people who no longer need or want their coverage.

When You’d Use Form 1099-SB (Late/Amended Returns)

For the 2020 tax year, if you sold your life insurance policy or transferred it to a foreign person, you should have received Form 1099-SB from your insurance company by January 31, 2021 (or by the standard deadline for furnishing recipient statements). You'll use this form when preparing your federal income tax return to properly calculate any taxable gain from the sale.

Filing Timeline: The insurance company that issues Form 1099-SB must file it with the IRS by February 28, 2021 (or March 31, 2021, if filing electronically). As the seller receiving the form, you use this information on your personal tax return, typically due April 15, 2021, for the 2020 tax year.

Late or Amended Situations: If you didn't receive Form 1099-SB when you should have, or if you received an incorrect form, contact the insurance company immediately. They are required to provide you with a corrected form within 15 calendar days if the transaction is rescinded. If you've already filed your tax return without this form and later receive it showing different information, you may need to file an amended return using Form 1040-X.

There's also a special circumstance worth noting: If a policy sale falls through (is rescinded), the insurance company must file a corrected Form 1099-SB within 15 calendar days of learning about the rescission. If this happens after you've filed your taxes, you'll want to work with a tax professional to correct your return.

If you're filing a late return for 2020 or amending a 2020 return in a subsequent year, you'll still need Form 1099-SB to accurately report the transaction. The IRS keeps records of these forms for years, so proper reporting remains important even after the initial filing deadline passes.

Key Rules or Details for 2020

Several important rules governed Form 1099-SB for the 2020 tax year. Understanding these helps you know whether you should receive this form and what to expect:

Who Must File: Life insurance companies (referred to as "issuers") must file Form 1099-SB if they receive notification of a reportable policy sale from an acquirer (often documented on Form 1099-LS) or if they receive notice that a policy was transferred to a foreign person. The issuer includes any company that bears risk under the policy or administers the contract.

Reportable Policy Sales Defined: A reportable policy sale occurs when someone acquires an interest in your life insurance contract, and that person doesn't have a substantial family, business, or financial relationship with the insured person (apart from the policy itself). This primarily affects life settlements where investors buy policies from strangers.

Foreign Person Transfers: Even if the sale doesn't meet the definition of a reportable policy sale, the insurance company must file Form 1099-SB if they receive notice that ownership transferred to a foreign person. This includes any indication that the new owner might be located outside the United States.

Separate Forms Required: Insurance companies must file a separate Form 1099-SB for each seller involved in a transaction. If multiple people owned interests in a policy, each receives their own form.

Investment Calculation Rules: For the original policyholder, "investment in the contract" means all premiums paid minus any amounts already received tax-free (like dividends or partial withdrawals). For someone who previously purchased the policy from someone else, the insurance company reports their best estimate of the investment, which may be limited to information actually known to the company.

E-Filing Threshold: For 2020, the e-filing threshold was generally 250 returns, meaning companies filing 250 or more information returns needed to file electronically. (Note: This threshold was subsequently lowered to 10 returns for years after 2023.)

Step-by-Step (High Level)

Step 1: The Policy Sale Transaction

When you sell your life insurance policy through a life settlement or broker, the buyer (acquirer) initiates the transaction. They will typically file Form 1099-LS with the IRS and provide a copy to the insurance company, reporting the purchase details.

Step 2: Insurance Company Receives Notification

Your insurance company receives either a copy of Form 1099-LS from the acquirer or notices the transfer when ownership documentation is submitted. This triggers their obligation to file Form 1099-SB on your behalf.

Step 3: Information Gathering

The insurance company reviews their records to determine your investment in the contract (Box 1) and calculates what the surrender amount would have been on the date of sale (Box 2). For original policyholders, they have complete premium payment records. For policies previously sold, they use available information.

Step 4: Form Preparation and Filing

The insurance company prepares Form 1099-SB with your taxpayer identification number (usually Social Security Number), name, address, policy number, investment amount, and surrender amount. They file this with the IRS and furnish you with Copy B.

Step 5: You Receive Your Copy

You should receive Copy B of Form 1099-SB by January 31 of the year following the sale (January 31, 2021, for 2020 transactions). Review it carefully for accuracy.

Step 6: Using the Form on Your Tax Return

When preparing your federal tax return, you'll report the sale proceeds (from Form 1099-LS that the buyer provides) and use Form 1099-SB to determine your cost basis. The difference between what you received and your investment determines your taxable gain. This typically gets reported on Schedule D (Capital Gains and Losses) or Form 8949, depending on the tax treatment.

Step 7: Retain Records

Keep Form 1099-SB with your tax records for at least three years from the date you filed your return, or longer if recommended by your tax advisor.

Common Mistakes and How to Avoid Them

Mistake #1: Ignoring Form 1099-SB

Some taxpayers receive Form 1099-SB and assume it's purely informational without tax consequences. In reality, this form is essential for calculating your taxable gain. Even if you don't receive a separate form showing proceeds (Form 1099-LS), you may still owe taxes on the sale.

How to Avoid: Treat Form 1099-SB as seriously as any other tax form. If you sold a life insurance policy, always report it on your tax return using the information from both Forms 1099-LS and 1099-SB.

Mistake #2: Confusing Investment Amount with Sale Proceeds

Box 1 shows your investment (cost basis), not what you received from the sale. Box 2 shows what you would have received from surrendering directly to the insurance company, which also isn't necessarily what you sold the policy for.

How to Avoid: Understand that Form 1099-SB provides context for calculating gain, while Form 1099-LS (from the buyer) shows the actual sale proceeds. You need both forms to properly report the transaction.

Mistake #3: Not Verifying Accuracy

Insurance companies estimate investment amounts based on available records, which may be incomplete, especially for policies that changed hands multiple times or are very old.

How to Avoid: Review Form 1099-SB immediately upon receipt. Compare Box 1 against your own premium payment records. If there's a discrepancy, contact the insurance company right away with documentation supporting your actual investment.

Mistake #4: Missing Foreign Transfer Reporting

If you transfer your policy to someone living abroad or a foreign entity, you might not realize this triggers Form 1099-SB requirements even without a formal "sale."

How to Avoid: Notify your insurance company immediately whenever ownership changes, especially to foreign persons. They need this information to meet their reporting obligations.

Mistake #5: Assuming No Tax If Below Cost Basis

While it's true you may not owe capital gains tax if you sold the policy for less than your investment, there can still be ordinary income tax consequences if you received more than the surrender amount shown in Box 2.

How to Avoid: Consult with a tax professional familiar with life insurance taxation. The tax treatment of life settlement sales is complex, with different portions potentially taxed as ordinary income versus capital gains.

Mistake #6: Not Requesting Corrected Forms

If the sale is rescinded or information is incorrect, some people simply ignore the erroneous Form 1099-SB rather than requesting a correction.

How to Avoid: Always request corrected forms when there are errors or rescissions. The insurance company is required to provide corrections within 15 days of learning about rescissions.

What Happens After You File

After your insurance company files Form 1099-SB with the IRS and furnishes you with a copy, several things occur:

IRS Matching Program: The IRS receives both Form 1099-SB (from the insurance company) and Form 1099-LS (from the buyer) regarding your policy sale. Their computers match these forms against your tax return to verify you properly reported the transaction. If there's a mismatch—such as missing income from your return—you may receive a CP2000 notice proposing additional tax, penalties, and interest.

Your Tax Calculation: You'll use the investment amount from Box 1 to calculate your cost basis. The taxable portion of your gain typically involves comparing what you received to this basis. The tax treatment can be complex: amounts received up to your cost basis are tax-free (return of investment), amounts between your cost basis and the surrender value (Box 2) may be ordinary income, and amounts above the surrender value may be capital gains.

Record Retention: Both you and the insurance company must retain copies of Form 1099-SB. The IRS requires businesses to keep these records for at least three years, though many keep them longer. You should also retain the form as part of your permanent tax records, especially if the policy had been held for many years.

Potential Audits: Life insurance policy sales can trigger IRS scrutiny because the tax treatment is complex and often involves large amounts of money. Having Form 1099-SB, along with Form 1099-LS and supporting documentation of your premium payments, strengthens your position if the IRS examines your return.

State Tax Implications: Most states follow federal tax treatment for life insurance policy sales, but some have different rules. After filing your federal return with Form 1099-SB information, check whether your state requires separate reporting or has different taxation rules.

Future Reference: If you later discover an error or if the sale is rescinded, Form 1099-SB serves as the starting point for corrections. The insurance company's 15-day correction requirement means you should receive updated information relatively quickly, allowing you to file an amended return if necessary.

FAQs

Q: Do I have to report Form 1099-SB on my tax return even if I didn't make a profit?

A: Yes. Even if you sold your policy for less than you invested (Box 1), you should still report the transaction on your tax return. While you may not owe tax on a loss, failing to report a transaction that the IRS has a record of (via Form 1099-SB) can trigger inquiries and potential penalties. Additionally, the tax calculation is more complex than simply comparing sale proceeds to investment—consult a tax professional.

Q: What if I never receive Form 1099-SB after selling my policy?

A: Contact the insurance company immediately. They are required to furnish the form by January 31 of the following year. If they claim they weren't notified of the sale, contact the buyer or broker who facilitated the transaction. You can also request help from the IRS, though you should make reasonable efforts to obtain the form from the issuer first. In the meantime, gather your own premium payment records to calculate your cost basis.

Q: Can the insurance company's estimate in Box 1 be wrong?

A: Yes, particularly for policies that have changed ownership multiple times or for older policies where records may be incomplete. The IRS regulations acknowledge that insurance companies report based on "information known to or reasonably estimated by the issuer." If you have better documentation showing your actual investment, you should use your records and attach an explanation to your tax return.

Q: I received Form 1099-LS from the buyer but not Form 1099-SB from the insurance company. What should I do?

A: Contact the insurance company immediately. Form 1099-LS (showing the sale proceeds) and Form 1099-SB (showing your investment) work together to help you calculate taxable gain. The insurance company may not have been properly notified of the sale, or there may have been a processing delay. You need both forms to accurately complete your tax return.

Q: How is Form 1099-SB different from Form 1099-R?

A: Form 1099-R is used to report distributions from retirement accounts, pensions, and annuities. Form 1099-SB specifically reports the seller's investment in a life insurance contract when the policy is sold or transferred to a foreign person. While both deal with insurance-related transactions, they serve different purposes and involve different types of contracts.

Q: What if my policy was in a trust or owned by my business?

A: The insurance company should issue Form 1099-SB to the legal entity that owned the policy—the trust or business. The taxpayer identification number on the form should match the trust's or business's EIN (Employer Identification Number) rather than your personal SSN. The trust or business then reports the transaction on its tax return, and if you're the beneficiary, the tax impact may flow through to you depending on the entity type.

Q: Are there penalties for insurance companies that don't file Form 1099-SB?

A: Yes. The IRS can impose penalties ranging from $60 to $330 per form for the 2020 tax year (depending on how late the filing is), with maximum annual penalties reaching $630,500 for larger issuers. However, these penalties apply to the insurance company, not to you as the seller. If you're concerned your insurance company hasn't filed, report this to the IRS and focus on properly reporting the transaction on your own return using available records.

Sources

Sources: IRS About Form 1099-SB
IRS Instructions for Form 1099-SB
IRS General Instructions for Certain Information Returns

This guide is for informational purposes only and should not be considered legal or tax advice. Consult with a qualified tax professional regarding your specific situation.

‍