Form 1099-SB: Seller's Investment in Life Insurance Contract – A Complete Guide for 2023

If you've sold or transferred your life insurance policy—perhaps through a life settlement or to a foreign person—you may receive Form 1099-SB. This IRS form reports critical information about your investment in the policy and what you would have received if you'd surrendered it instead. Here's everything you need to know about this specialized tax form in plain English.

What the Form Is For

Form 1099-SB, officially titled ""Seller's Investment in Life Insurance Contract,"" is used by life insurance companies (called ""issuers"" in IRS terminology) to report information when a life insurance policy is sold or transferred in specific circumstances.

The form comes into play in two main situations: First, when you participate in what's called a ""reportable policy sale""—essentially selling your life insurance policy to someone who doesn't have a substantial family, business, or financial relationship with the insured person (such as in a life settlement transaction). Second, when a life insurance policy is transferred to a foreign person or entity.

Think of it this way: Traditional life insurance works when you keep the policy until death or surrender it back to the insurance company. But sometimes people sell their policies to third-party investors. When this happens, the IRS wants to track the transaction for tax purposes. Form 1099-SB provides crucial information about what you originally invested in the policy (premiums paid minus any amounts already received) and what the surrender value was at the time of sale. IRS.gov

The insurance company—not you or the buyer—files this form with the IRS and sends you a copy. The information helps you (and the IRS) calculate whether you have taxable gain or loss from the transaction, since the tax treatment differs significantly from receiving a standard death benefit.

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

You'll receive Form 1099-SB from the life insurance company if you sold or transferred your policy during the 2023 tax year. The company must furnish your copy by February 15, 2024—earlier than many other 1099 forms. However, there's an important exception: if the insurance company doesn't receive notice of a transfer to a foreign person until after January 31, 2024, they have 30 days from when they receive that notice to send you the form. 2023 General Instructions for Certain Information Returns

Late Forms

If you haven't received your Form 1099-SB by mid-February and you know you sold or transferred your policy in 2023, contact the insurance company directly. They're required to provide it to you. If they fail to do so, you should still report the transaction on your tax return using the best information available and document your attempts to obtain the form.

Amended/Corrected Forms

Sometimes insurance companies make mistakes—perhaps they reported the wrong investment amount or misspelled your name. If you receive a corrected Form 1099-SB (marked ""CORRECTED"" in the checkbox), don't ignore it. The corrected version supersedes the original, and you may need to amend your tax return if you've already filed. The insurance company has specific correction procedures they must follow, typically filing a new form marked as corrected with both the IRS and you as soon as they discover the error. 2023 General Instructions

Rescission (Canceled Sales)

There's also a rare situation called ""rescission"" where a reportable policy sale is canceled or undone after the paperwork has been filed. In this case, the insurance company must file a corrected Form 1099-SB within 15 days of being notified about the rescission.

Key Rules for 2023

Understanding the key requirements helps ensure you're handling this form correctly:

Filing Deadlines

Filing Deadlines: Insurance companies must file Form 1099-SB with the IRS by February 28, 2024 if filing on paper, or April 1, 2024 if filing electronically. There's a special regulatory exception in Section 1.6050Y-3(c) that may apply in certain circumstances. 2023 General Instructions

Who Must File

Who Must File: Only the life insurance company (the issuer) files Form 1099-SB—you as the seller do not file this form. The insurance company must file if they received a statement from an acquirer in a reportable policy sale (such as a copy of Form 1099-LS from the buyer) or if they received notice of a transfer to a foreign person. Instructions for Form 1099-SB

Separate Form Rule

Separate Form Rule: The insurance company must file a separate Form 1099-SB for each seller. If multiple people own interests in a single policy and all sell their interests, each owner gets their own form.

What’s Reported

What's Reported: The form contains two critical pieces of information:

• Box 1 (Investment in Contract): This shows your investment in the policy—essentially the total premiums paid minus any amounts you previously received tax-free from the policy. For original policyholders, this calculation is precise. For policies that changed hands before, the insurance company reports an estimate based on information they have or can reasonably estimate.
• Box 2 (Surrender Amount): This shows what you would have received if you had surrendered the policy to the insurance company on the date of sale rather than selling it to a third party. This ""what if"" number is important for tax calculations.

Truncation Rules

Truncation Rules: Your taxpayer identification number (Social Security Number or EIN) may be truncated (partially hidden) on your copy of the form for privacy protection, but the IRS receives the complete number. Instructions for Form 1099-SB

Step-by-Step (High Level)

Here's what happens from start to finish when Form 1099-SB comes into play:

Step 1: The Sale or Transfer Happens

You decide to sell your life insurance policy through a life settlement company or transfer it to a foreign entity. The buyer (acquirer) completes their purchase.

Step 2: The Acquirer Notifies the Insurance Company

The buyer files Form 1099-LS (Reportable Life Insurance Sale) with the IRS and sends a copy to the insurance company. This statement notifies the insurance company that a reportable policy sale has occurred. Alternatively, for foreign transfers, the insurance company receives notice through address changes or other documentation showing foreign ownership.

Step 3: Insurance Company Calculates Required Information

Once notified, the insurance company determines your investment in the contract and calculates what the surrender amount would have been on the sale date. They gather your taxpayer identification number and current address.

Step 4: Form 1099-SB Is Filed and Furnished

The insurance company files Form 1099-SB with the IRS (along with Form 1096 as a transmittal if filing on paper) and furnishes your copy by the February 15 deadline.

Step 5: You Receive and Review Your Copy

You receive Copy B of Form 1099-SB in the mail. Carefully review all information—your name, TIN, the policy number, and the reported amounts—to ensure accuracy.

Step 6: You Use the Information for Tax Reporting

When preparing your tax return, use the information from Form 1099-SB along with the proceeds you actually received from the sale to calculate your taxable gain or loss. The tax treatment is complex: typically, the amount up to your investment (Box 1) is tax-free recovery of your basis, amounts between your investment and the surrender value (Box 2) are taxed as ordinary income, and amounts above the surrender value are taxed as capital gains.

Step 7: Keep Records

The insurance company must keep copies of filed forms or be able to reconstruct the data for at least three years. You should similarly maintain your copy along with all documentation related to the policy sale for your tax records.

Common Mistakes and How to Avoid Them

Learning from typical errors can save you headaches and potential penalties:

Mistake #1: Ignoring the Form

Some taxpayers mistakenly believe that because the insurance company files Form 1099-SB, they don't need to report the transaction on their own return. Wrong! You must report the sale on your tax return, using the information from Form 1099-SB to help calculate your gain or loss. Not reporting it can trigger IRS inquiries and potential penalties.

Mistake #2: Confusing Box 1 and Box 2

These two amounts serve different purposes in your tax calculation, and mixing them up leads to incorrect reporting. Box 1 (investment in contract) represents your basis—what you won't be taxed on. Box 2 (surrender amount) is a reference point for determining how much of your gain is ordinary income versus capital gain. Understanding the distinction is crucial.

Mistake #3: Not Verifying Information

Always check that your name, TIN, and policy number are correct. Errors in taxpayer identification information can delay processing and trigger backup withholding notices. If you spot an error, contact the insurance company immediately to request a corrected form.

Mistake #4: Losing the Form

Form 1099-SB arrives early in tax season (February 15), and some people misplace it by the time they prepare their return. Create a dedicated folder for tax documents and file Form 1099-SB there as soon as it arrives. If you lose it, contact the insurance company for a duplicate before filing your return.

Mistake #5: Not Understanding the Tax Implications

The taxation of life settlement proceeds is complex and differs from ordinary life insurance death benefits (which are typically tax-free). Many taxpayers underestimate their tax liability or fail to make estimated tax payments, leading to underpayment penalties. Consider consulting a tax professional familiar with life settlement transactions to ensure proper reporting.

Mistake #6: Assuming All Policies Qualify

Not every policy transfer generates Form 1099-SB. If you transfer a policy to someone with a ""substantial family, business, or financial relationship"" with the insured person, it may not be a reportable policy sale. Similarly, certain exceptions exist. Don't assume you'll receive the form in every transfer situation, but also don't assume you won't owe taxes just because you didn't receive one. Instructions for Form 1099-SB

What Happens After You File

Once Form 1099-SB has been filed and you've reported the transaction on your tax return, several things occur:

IRS Matching

The IRS receives the Form 1099-SB information from the insurance company and will match it against your tax return. This matching process typically happens months after you file. If the IRS systems detect discrepancies—for example, if you failed to report the transaction or reported different amounts—you'll likely receive a notice (typically a CP2000) proposing changes to your return and additional tax, interest, and possibly penalties.

Record Retention

Keep your copy of Form 1099-SB along with all supporting documentation about the life insurance policy sale for at least three years from your tax return filing date (or four years if backup withholding was involved). The IRS generally has three years to audit your return, though this period extends to six years in certain circumstances. Your records are your best defense if questions arise later. 2023 General Instructions

State Tax Considerations

While Form 1099-SB is a federal form, many states have their own tax treatment of life settlement proceeds. Some states conform to federal tax law, while others have different rules. Don't assume your state tax return will mirror your federal return. Check with your state tax department or a tax professional familiar with your state's laws.

Potential Audits

Life settlement transactions can trigger IRS scrutiny because they're relatively uncommon and involve significant dollar amounts. Ensure your reporting is accurate and defensible. If you're selected for audit, having complete documentation—the sales contract, Form 1099-SB, Form 1099-LS (if you received one as the seller), premium payment records, and correspondence with the insurance company—will be invaluable.

Penalties for Non-Compliance

While you as the recipient don't have filing responsibilities for Form 1099-SB, the insurance company faces penalties for failure to file correctly. Penalties range from $60 to $310 per form depending on how late the filing is, with intentional disregard resulting in at least $630 per form with no maximum penalty cap. These penalties incentivize insurance companies to file correctly and on time. 2023 General Instructions

FAQs

Q1: Do I need to file Form 1099-SB with my tax return?

No. Form 1099-SB is an information return filed by the life insurance company with the IRS. You receive a copy for your records and to help you prepare your tax return, but you don't attach it to your return when you file. However, you must report the life insurance policy sale transaction on your return, typically on Form 8949 and Schedule D (for capital gains/losses) and possibly on Form 1040 or related schedules for the ordinary income portion.

Q2: Is the amount in Box 1 or Box 2 what I actually received from selling my policy?

Neither! This is a common source of confusion. Box 1 shows your investment in the contract (your basis), and Box 2 shows what you would have received if you'd surrendered the policy to the insurance company instead of selling it. The actual amount you received from the buyer should be documented in your sale agreement and possibly on Form 1099-LS (which the buyer may have sent you). You'll need all three pieces of information—your investment (Box 1), the surrender amount (Box 2), and the actual proceeds you received—to correctly calculate your tax liability.

Q3: Why did I receive Form 1099-SB if I sold my policy to a family member?

If you received Form 1099-SB, the insurance company believes the transaction qualifies as a reportable policy sale. However, sales to purchasers with a ""substantial family, business, or financial relationship"" with the insured person generally aren't reportable policy sales. If you believe the form was issued in error—for example, you sold the policy to your spouse or child—contact the insurance company immediately to discuss whether the form should be rescinded or corrected. You may need to provide documentation of the family relationship.

Q4: What if the amounts on Form 1099-SB don't match what I thought they should be?

First, understand what each box represents—many disputes arise from misunderstanding the form. If you still believe there's an error, contact the insurance company's tax reporting department right away with specific documentation of why you believe the amount is incorrect (such as premium payment receipts or previous account statements). The insurance company has correction procedures they must follow if they agree an error was made. Don't simply ignore the form or report different amounts without proper correction documentation, as this will trigger IRS matching notices.

Q5: I sold my life insurance policy in 2023 but haven't received Form 1099-SB. What should I do?

First, verify whether your transaction actually qualifies as a reportable policy sale—not all policy transfers do. If you sold through a life settlement company to an unrelated third-party investor, it should be reportable. Contact the insurance company's tax reporting or customer service department to inquire about the form. If they confirm they should have issued it, request they send a duplicate. If you cannot obtain the form before your tax filing deadline, you should still report the transaction using the best information you have available, noting in your records that you attempted to obtain Form 1099-SB.

Q6: Do I have to pay taxes on the entire amount I received from selling my life insurance policy?

Not necessarily. The taxation is tiered: amounts up to your investment in the contract (Box 1) represent tax-free return of your premium payments (your basis). Amounts between your investment and the cash surrender value (Box 2) are generally taxed as ordinary income. Amounts above the cash surrender value are typically taxed as long-term capital gains (if you held the policy for more than one year). This tiered structure means your tax rate will vary depending on the sale proceeds. Due to this complexity, many taxpayers benefit from professional tax assistance when reporting life settlement proceeds.

Q7: Can I avoid taxes by not cashing the check from the life settlement?

No. Tax liability generally arises when you have the right to receive payment, not when you actually deposit the check. This is called ""constructive receipt"" in tax law. Once the sale closes and funds are available to you, the taxable event has occurred, even if you delay cashing the check. Similarly, if proceeds are placed in escrow on your behalf, this typically constitutes receipt for tax purposes.

Sources

Sources: This guide is based on official IRS publications, including About Form 1099-SB, Instructions for Form 1099-SB, and the 2023 General Instructions for Certain Information Returns. Tax laws are complex and subject to change. For specific situations, consult a qualified tax professional or contact the IRS directly.

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