Form 1099-SB: Seller's Investment in Life Insurance Contract (2017)

What Form 1099-SB Is For

Form 1099-SB, officially titled "Seller's Investment in Life Insurance Contract," is a tax information form that life insurance companies must file when someone sells their life insurance policy or transfers it to a foreign person. This form was created as part of the Tax Cuts and Jobs Act of 2017 and became effective for transactions occurring after December 31, 2017.

The form serves a specific purpose: it reports two critical numbers to both the IRS and the policy seller—the "investment in contract" (essentially what you've paid into the policy minus what you've received) and the "surrender amount" (what you would have gotten if you'd simply cashed in the policy instead of selling it). These figures help the IRS ensure that life insurance policy sales are properly taxed.

You'll typically receive this form if you sold your life insurance policy to a third party in what's called a "reportable policy sale"—often referred to as a life settlement. In these transactions, someone buys your life insurance policy from you, usually for more than the surrender value but less than the death benefit. The buyer has no family, business, or financial relationship with the insured person beyond owning the policy. IRS.gov

The form is filed by the insurance company (called the "issuer" in tax language), not by you as the seller. However, you'll receive a copy because this information is essential for calculating any taxable gain from the sale on your personal tax return.

When You’d Use Form 1099-SB (Late or Amended Filing)

As a policy seller, you don't file Form 1099-SB—you receive it. The insurance company must provide you with a copy by January 31 of the year following the sale. If you sold a policy in 2017 (after December 31, 2017, when the law took effect), you should have received your Form 1099-SB by January 31, 2018.

If you never received your form: Contact the insurance company immediately. They are legally required to provide it to you. Keep records of your attempts to obtain it, as you're still responsible for reporting the sale on your tax return even without the form in hand.

If you need to file a late or amended return for 2017: You may need Form 1099-SB information if you're filing a late return or amending your 2017 tax return to properly report a life insurance policy sale. The three-year statute of limitations for amending returns generally gives you until April 15, 2021 (or three years from when you actually filed) to amend your 2017 return. However, if there's a substantial error or unreported income, you should address it as soon as possible.

Important note about 2017 timing: Because the reporting requirement became effective for transactions after December 31, 2017, technically no Form 1099-SB would have been issued for calendar year 2017. The first forms would apply to 2018 transactions. If you're dealing with a 2017 policy sale that occurred before December 31, 2017, this form wouldn't apply—though you'd still need to report any taxable income from the sale. IRS.gov

Rescissions: If a reportable policy sale is canceled or rescinded, the insurance company must file a corrected Form 1099-SB within 15 calendar days of receiving notice of the rescission.

Key Rules or Details for 2017

The reporting requirements under Section 6050Y of the Internal Revenue Code were enacted as part of the Tax Cuts and Jobs Act signed into law in December 2017, making them effective for transactions occurring after December 31, 2017. Here are the critical rules that applied:

• Effective Date: Forms 1099-SB apply to reportable policy sales and transfers to foreign persons that occurred after December 31, 2017. This means the first reporting year was actually 2018, not 2017. RSM
• What Qualifies as a Reportable Policy Sale: A sale is reportable when someone acquires an interest in a life insurance contract and has "no substantial family, business, or financial relationship" with the insured person (other than owning the policy). This typically includes life settlement transactions where investors buy policies from strangers.
• Who Files: The insurance company (issuer) must file Form 1099-SB, not the seller. An issuer includes any company that bears risk under the policy or is responsible for administering it, collecting premiums, and paying death benefits.
• Two Key Numbers Reported:
  • Investment in Contract (Box 1): For the original policyholder, this is all premiums paid minus any amounts received tax-free. For subsequent owners, it's an estimate of what that person paid for the policy minus what they received.
  • Surrender Amount (Box 2): The amount the seller would have received if they had surrendered the policy to the insurance company on the date of sale instead of selling it to a third party.
• Transition Relief: When final regulations were published on October 31, 2019, the IRS granted an additional 120 days (until March 1, 2020) for companies to implement systems for compliance. However, this didn't eliminate the obligation to report transactions from January 1, 2018 onward. IRS.gov

Step-by-Step (High Level)

For Policy Sellers (What to Expect)

Step 1: Complete the Sale

When you sell your life insurance policy to a third party (such as a life settlement company), you'll sign transfer documents. The buyer (called the "acquirer") will notify the insurance company about the purchase using Form 1099-LS.

Step 2: Insurance Company Receives Notice

Once the insurance company receives Form 1099-LS from the buyer or otherwise learns about the transfer to a foreign person, they're triggered to prepare Form 1099-SB. They must file a separate form for each seller involved in the transaction.

Step 3: Receive Your Copy

By January 31 of the following year, you should receive Copy B of Form 1099-SB from the insurance company. This is your copy for tax filing purposes. The insurance company simultaneously files Copy A with the IRS.

Step 4: Review the Information

Check that all information is correct—your name, taxpayer identification number, the policy number, and especially the two dollar amounts (investment in contract and surrender amount). These figures are crucial for your tax calculations.

Step 5: Use It on Your Tax Return

You'll use the information from Form 1099-SB to calculate your taxable gain on the policy sale. The general rule is that you'll report gain equal to the amount you received from the buyer minus your investment in the contract (shown in Box 1). Your tax professional will help you determine how much is taxed as ordinary income versus capital gains.

For Insurance Companies (Issuers)

Insurance companies must file Form 1099-SB when they receive Form 1099-LS from an acquirer reporting a sale, or when they receive notice that a policy has been transferred to a foreign person. They must determine the seller's investment in the contract and the surrender amount, complete the form, file it with the IRS (electronically if filing 10 or more returns), and provide a copy to the seller by January 31. IRS.gov

Common Mistakes and How to Avoid Them

Mistake #1: Not Reporting the Sale at All

Some taxpayers receive Form 1099-SB but don't realize they need to report the policy sale on their tax return. The form is informational—you still must calculate and report any taxable gain on Form 1040.

How to Avoid: Provide Form 1099-SB to your tax preparer and ensure the sale is included on your return. Even if you don't receive the form, you're still required to report the sale.

Mistake #2: Confusing Investment with Sale Price

The "investment in contract" (Box 1) is NOT what you received for selling the policy. It's what you paid into the policy over the years. Your taxable gain is generally the sale price minus the investment amount.

How to Avoid: Keep careful records of sale documents showing exactly what you received from the buyer. Compare this to Box 1 of Form 1099-SB to calculate your gain correctly.

Mistake #3: Missing the Form Entirely

If the insurance company has outdated contact information, you might never receive Form 1099-SB. However, the IRS still gets their copy, so they expect you to report the income.

How to Avoid: Update your address with the insurance company after any policy sale. If January 31 passes without receiving the form, contact the issuer immediately to request a duplicate.

Mistake #4: Treating All Gain as Capital Gains

Life insurance policy sales can result in three types of income: return of basis (tax-free), ordinary income (up to the policy's cash value), and capital gains (amounts exceeding cash value). Many taxpayers incorrectly treat everything as capital gains.

How to Avoid: Work with a tax professional familiar with life insurance taxation. The calculation involves comparing the sale price, investment in contract, and surrender amount (Box 2).

Mistake #5: Assuming You Don't Need Professional Help

The taxation of life insurance policy sales is complex, involving multiple IRS code sections and regulations. DIY tax software may not handle these transactions correctly.

How to Avoid: Consult a CPA or enrolled agent experienced in life insurance transactions, especially for significant policy sales.

What Happens After You File

For Policy Sellers

Once you file your tax return including the income from your life insurance policy sale:

IRS Matching: The IRS will match the Form 1099-SB they received from the insurance company against your tax return. If you reported the sale correctly, no further action is needed. If there's a discrepancy, you may receive a notice requesting clarification or asserting additional tax owed.

Payment of Tax: Any tax owed on the sale is due by the April 15 tax deadline (or October 15 if you file an extension). Consider making estimated tax payments if the sale occurs during the year to avoid underpayment penalties.

Statute of Limitations: Generally, the IRS has three years from your filing date to audit your return. Keep Form 1099-SB and all documentation about the policy sale for at least three years, though seven years is recommended for significant transactions.

State Tax Implications: Don't forget that most states also tax gains from life insurance policy sales. You may need to report the sale on your state return as well, though state forms and requirements vary.

Future Forms: If you still own other life insurance policies and later sell them, you'll go through this process again with new Forms 1099-SB for each subsequent sale.

For Insurance Companies

After filing Form 1099-SB, insurance companies must retain copies for at least three years. They may face penalties for failing to file, filing late, or filing incorrect information—ranging from $60 to $330 per form for 2024 (penalties adjust annually). The IRS may also audit their compliance with reporting requirements. IRS.gov

FAQs

Q1: Will I definitely owe taxes if I receive Form 1099-SB?

Not necessarily. You'll only owe taxes if you sold the policy for more than your investment in the contract (shown in Box 1). If you sold the policy for less than your investment—which is rare but can happen—you may actually have a loss. However, personal life insurance losses generally aren't deductible. The taxable amount depends on the sale price compared to your basis.

Q2: What's the difference between Form 1099-SB and Form 1099-LS?

Form 1099-LS is filed by the buyer (acquirer) of the life insurance policy and reports information about the transaction itself and payments to the seller. Form 1099-SB is filed by the insurance company and reports the seller's investment in the policy and what the surrender value was. You might receive both forms for the same transaction—they serve different purposes and come from different parties.

Q3: I received a death benefit payout, not a sale. Do I need Form 1099-SB?

No. Form 1099-SB only applies when a policy is sold or transferred while the insured is still living. Death benefits are reported on Form 1099-R if there was a prior reportable policy sale, but that's a different situation. Standard death benefits to beneficiaries are generally not reported on Form 1099-SB.

Q4: What if the investment in contract amount (Box 1) seems wrong?

Contact the insurance company immediately if you believe the figure is incorrect. For the original policyholder, they should have records of all premiums paid. If you purchased the policy from someone else, the issuer may only have an estimate of what you paid. Provide documentation to support the correct amount, and the issuer can file a corrected Form 1099-SB.

Q5: Do all life insurance policy transfers require Form 1099-SB?

No. The form is only required for "reportable policy sales"—generally sales to parties with no family, business, or financial relationship to the insured (life settlements). Transfers to family members, business partners, transfers incident to divorce, and certain other exceptions don't trigger reporting. Also, traditional policy surrenders back to the insurance company aren't reportable policy sales.

Q6: Can I use tax software to report my life insurance policy sale, or do I need a professional?

While some advanced tax software can handle these transactions, the taxation of life insurance policy sales is complex. The gain may be split between ordinary income (taxed at your regular rate) and capital gains (taxed at preferential rates). Given the complexity and potential for error, consulting a tax professional is strongly recommended, especially for substantial sales.

Q7: What if my policy sale was to a foreign buyer or I transferred the policy to a foreign person?

The insurance company must still file Form 1099-SB when they receive notice of a transfer to a foreign person, even if it wasn't technically a "sale." Notice of a transfer to a foreign person can include any communication indicating the policy was transferred, including address changes to foreign locations. The reporting helps the IRS track policies that may be subject to different tax rules. IRS.gov

Sources / Additional Resources

• IRS Form 1099-SB: www.irs.gov/forms-pubs/about-form-1099-sb
• Instructions for Form 1099-SB: www.irs.gov/instructions/i1099sb
• General Instructions for Certain Information Returns: www.irs.gov/instructions/i1099gi

This guide provides general information for educational purposes. Tax situations vary, and you should consult a qualified tax professional for advice specific to your circumstances.

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