Form 1099-SB: Seller's Investment in Life Insurance Contract (2018)

What Form 1099-SB Is For

Form 1099-SB is an information return used to report your investment in a life insurance policy when you sell or transfer it under specific circumstances. Introduced in 2018 under Internal Revenue Code Section 6050Y, this form was created as part of the Tax Cuts and Jobs Act to help the IRS track life insurance transactions that occur in the secondary market.

The form serves two main purposes. First, it reports what you actually paid into your life insurance policy over the years—essentially your "cost basis" in the contract. Second, it shows what you could have received if you had simply surrendered the policy back to the insurance company instead of selling it to a third party. This information is crucial because it helps you calculate any taxable gain when you sell your policy. IRS

You'll receive Form 1099-SB from the life insurance company (called the "issuer") that originally issued your policy, not from the buyer. The form is filed when you participate in what's called a "reportable policy sale"—typically when you sell your life insurance policy to someone who doesn't have a close family, business, or financial relationship with the person insured under the contract. Common examples include life settlements (selling a policy you no longer need) or viatical settlements (selling a policy when you're terminally or chronically ill). IRS

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

For transactions occurring in 2018, the insurance company issuer was required to file Form 1099-SB with the IRS by February 28, 2019 (or March 31, 2019, if filing electronically). You should have received your copy by January 31, 2019. However, 2018 was the first year this form was required, and the IRS provided some transitional relief for issuers who needed additional time to implement their reporting systems.

If you never received a Form 1099-SB but sold your life insurance policy in a reportable sale during 2018, you're still required to report the transaction on your tax return. You can contact the insurance company to request the form or work with a tax professional to estimate your investment in the contract based on your premium payment records.

For amended situations, if the insurance company discovers they reported incorrect information on your original Form 1099-SB, they must file a corrected form. The issuer will check the "CORRECTED" box at the top of the new form and send you a copy. If you've already filed your tax return using the incorrect information, you may need to file Form 1040-X (Amended U.S. Individual Income Tax Return) to correct your original filing. IRS

Key Rules or Details for 2018

The 2018 tax year marked the debut of Form 1099-SB, implementing new reporting requirements under Section 6050Y. Several important rules governed how this form was used:

Who Must File

Only the life insurance company issuer is required to file Form 1099-SB. The buyer (acquirer) of the policy files a different form (Form 1099-LS), and you as the seller receive copies of both forms but don't file either one yourself.

When It's Required

The issuer must file Form 1099-SB when they receive notice of two specific types of transactions: (1) a reportable policy sale where someone acquires your life insurance policy without having a substantial family, business, or financial relationship with the insured person, or (2) a transfer of the life insurance contract to a foreign person.

Separate Forms

If you sold interests in multiple life insurance policies during 2018, you'll receive a separate Form 1099-SB for each policy. Similarly, if multiple people owned the policy together, each seller receives their own form.

Privacy Protection

The insurance company may truncate (partially hide) your Social Security number or other taxpayer identification number on the copy you receive, showing only the last four digits for your privacy. However, the copy filed with the IRS contains your complete taxpayer identification number.

Information Reported

Form 1099-SB contains two critical pieces of information. Box 1 shows your "investment in the contract"—the total premiums you paid minus any amounts you previously received from the policy that weren't taxed. Box 2 shows the "surrender amount"—what you would have received if you had surrendered the policy to the insurance company on the date of the sale. IRS

Step-by-Step (High Level)

Step 1: Verify You Should Receive the Form

If you sold or transferred your life insurance policy in 2018 to someone without a substantial family or business relationship to the insured person, or if you transferred it to a foreign person, you should receive Form 1099-SB from the insurance company.

Step 2: Receive and Review the Form

The insurance company should send you Form 1099-SB by January 31, 2019 (for 2018 transactions). Carefully review all information for accuracy, including your name, address, taxpayer identification number, the policy number, and the amounts reported in Boxes 1 and 2.

Step 3: Compare with Form 1099-LS

You should also receive Form 1099-LS from the buyer (acquirer) who purchased your policy. This form shows the actual amount you received from the sale. You'll need both forms to calculate your taxable gain.

Step 4: Calculate Your Taxable Gain

Your taxable gain is generally the amount you received from the sale (shown on Form 1099-LS) minus your investment in the contract (shown in Box 1 of Form 1099-SB). The surrender amount in Box 2 helps determine how much of your gain is taxed as ordinary income versus capital gain.

Step 5: Report on Your Tax Return

Report the sale on your Form 1040 tax return. The portion of your gain up to the surrender amount is typically taxed as ordinary income, while any excess may be taxed as capital gain. Many taxpayers work with a tax professional for this calculation, as the tax treatment of life insurance policy sales can be complex.

Step 6: Keep Records

Retain copies of both Forms 1099-SB and 1099-LS, along with any premium payment records and your original life insurance policy documents. The IRS generally has three years to audit your return, so keep these documents for at least that long. IRS

Common Mistakes and How to Avoid Them

Mistake 1: Ignoring the Form

Some people assume that because they didn't file the form themselves, they don't need to do anything with it. Wrong. The information on Form 1099-SB is essential for reporting the sale correctly on your tax return. The IRS receives a copy, so they'll expect to see the transaction reported. Always use the form to calculate your taxable gain.

Mistake 2: Confusing It with Form 1099-LS

Form 1099-SB (from the insurance company) and Form 1099-LS (from the buyer) work together but report different information. The 1099-SB shows your investment and what you could have received in a surrender; the 1099-LS shows what you actually received from the buyer. You need both forms to complete your tax reporting accurately.

Mistake 3: Assuming No Tax Is Due

Life insurance death benefits are generally tax-free, leading some people to mistakenly believe selling a policy is also tax-free. It's not. When you sell a policy, any amount you receive above your investment is typically taxable income. Don't skip reporting the sale just because it involves life insurance.

Mistake 4: Using the Wrong Amounts

Box 1 shows your investment (cost basis), and Box 2 shows the surrender value. These are different amounts with different purposes. Don't confuse them when calculating your gain. Your basis for calculating gain is Box 1, not Box 2.

Mistake 5: Failing to Report When Forms Are Missing

If you sold your policy but didn't receive a Form 1099-SB, you're still legally required to report the sale. Gather your premium payment records and contact the insurance company or work with a tax professional to determine your investment in the contract.

Mistake 6: Not Seeking Professional Help

The taxation of life insurance policy sales is complex, involving questions about cost basis, ordinary income versus capital gain treatment, and potential exceptions. For 2018, the first year of these new forms, many situations arose that required professional interpretation. Don't hesitate to consult a tax professional, especially for high-value policies.

What Happens After You File

After you receive Form 1099-SB and report the life insurance policy sale on your 2018 tax return, several things occur:

IRS Matching

The IRS receives copies of all Forms 1099-SB filed by insurance companies. Their computers match this information against what you reported on your tax return. If you don't report the sale or the amounts don't match, you may receive a notice from the IRS requesting an explanation or proposing additional tax.

Tax Payment

If the sale resulted in a taxable gain, you'll owe income tax on that amount. Depending on the tax treatment, the gain may be taxed as ordinary income (at your regular income tax rates) or partially as capital gain (potentially at lower rates). The surrender amount in Box 2 is particularly important for this determination.

Future Reference

Keep your Form 1099-SB with your tax records. If you have questions about the sale years later, or if the IRS audits your return, this form provides crucial documentation of the transaction.

No Direct Action Required from IRS

If you correctly report the sale and pay any tax due, you won't receive any special acknowledgment from the IRS. The processing happens automatically as part of your normal tax return filing.

Statute of Limitations

Generally, the IRS has three years from the date you file your return to audit it and assess additional tax. However, this period can be longer in cases of substantial underreporting or fraud. Keeping your Form 1099-SB and supporting documentation for at least three years (longer is better) protects you if questions arise. IRS

FAQs

Q1: Why did I receive Form 1099-SB when I sold my life insurance policy?

You received Form 1099-SB because your life insurance company is required by law to report certain policy transfers. When you sell or transfer a life insurance policy in a "reportable policy sale"—meaning to someone without a close personal or business relationship to the insured person—the insurance company must report your investment in the policy and what you could have received if you'd surrendered it instead of selling it. This helps ensure proper tax reporting of the sale.

Q2: Do I have to pay taxes on the amounts shown on Form 1099-SB?

Not necessarily on those exact amounts. The amounts on Form 1099-SB are information to help you calculate your taxable gain. Your actual tax is based on the difference between what you received from the sale (shown on Form 1099-LS from the buyer) and your investment in the contract (shown in Box 1 of Form 1099-SB). Only the gain—the excess over your investment—is taxable.

Q3: What if the information on Form 1099-SB is incorrect?

Contact the insurance company immediately to request a corrected form. They should issue a corrected Form 1099-SB with the accurate information. If you've already filed your tax return using the incorrect information, you may need to file an amended return (Form 1040-X) once you receive the corrected form.

Q4: I sold my policy to my business partner. Will I receive Form 1099-SB?

It depends on whether the sale qualifies as a "reportable policy sale." If your business partner has a substantial business relationship with the insured person, the sale may not be reportable, and you wouldn't receive Form 1099-SB. However, the determination of what constitutes a "substantial" relationship can be complex. The insurance company makes the initial determination based on information provided to them.

Q5: What's the difference between Box 1 and Box 2 on Form 1099-SB?

Box 1 shows your investment in the contract—the total premiums you paid over the years, minus any amounts you previously received from the policy that weren't subject to tax. This is essentially your cost basis. Box 2 shows the surrender amount—what the insurance company would have paid you if you had surrendered the policy to them on the date you sold it to a third party. Box 2 helps determine how much of your gain is ordinary income versus capital gain for tax purposes.

Q6: I received Form 1099-SB but never received any money from the insurance company. Why?

Form 1099-SB doesn't report money you received from the insurance company. Instead, it reports your historical investment in the policy and what you could have received if you'd surrendered it. The money you actually received from the sale comes from the buyer (acquirer) and is reported on Form 1099-LS, which you should also receive. Form 1099-SB provides reference information needed to calculate your taxable gain.

Q7: What penalties apply if the insurance company fails to file Form 1099-SB?

The insurance company (issuer) faces penalties if they fail to file required Forms 1099-SB or file them late. For 2018, penalties could range from $50 to $270 per form depending on how late the filing was, with maximum aggregate penalties that could reach hundreds of thousands of dollars for large issuers. However, as the policy seller, you're not responsible for the issuer's filing obligations—though you still must report the sale on your tax return even if you don't receive the form. IRS

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