Form 1099-SB: Seller's Investment in Life Insurance Contract (2019) — A Complete Guide
When life insurance policies change hands through sales or transfers to foreign parties, the IRS needs to keep track of what happened. That's where Form 1099-SB comes in—a specialized tax form that helps report these unique transactions. If you've sold your life insurance policy or you're an insurance company dealing with policy transfers, this guide will walk you through everything you need to know about this relatively uncommon but important tax document.
What Form 1099-SB Is For
Form 1099-SB, officially titled ""Seller's Investment in Life Insurance Contract,"" serves a very specific purpose in the tax world. This form is used by life insurance companies (called ""issuers"" in tax language) to report critical financial information when someone sells their life insurance policy or transfers it to a foreign person.
Think of it this way: when you sell a life insurance policy—perhaps to a life settlement company or investor—you're essentially selling an asset. Just like selling stock or real estate, this transaction has tax consequences. Form 1099-SB tells both you and the IRS two crucial pieces of information: how much you originally invested in the policy (premiums paid minus amounts previously received) and what the policy's surrender value was at the time of the sale.
The form specifically comes into play during what the IRS calls a ""reportable policy sale""—basically any situation where someone acquires an interest in a life insurance policy when they don't have a substantial family, business, or financial relationship with the person insured. This prevents the arrangement from qualifying for the typical life insurance tax benefits. The most common scenario is selling a policy to a third-party investor or life settlement company. IRS.gov
When You’d Use Form 1099-SB (Including Late and Amended Filings)
For the 2019 tax year, insurance companies that issued Form 1099-SB had specific deadlines to meet. The form had to be filed with the IRS by February 28, 2020 (or March 31, 2020, if filing electronically), and copies had to be furnished to the seller by January 31, 2020.
If you're an insurance company that missed these deadlines or made errors on the original form, you can file a corrected Form 1099-SB. There's one special circumstance where timing becomes critical: if a reportable policy sale is rescinded (canceled), you must file a corrected form within just 15 calendar days of receiving notice of the rescission. This tight deadline ensures everyone's records stay accurate when deals fall through.
As a seller receiving this form, you'll use the information when preparing your 2019 tax return (typically filed in 2020). The amounts reported affect how you calculate any taxable gain from selling your policy. If you receive a corrected form after you've already filed your taxes, you may need to file an amended return using Form 1040-X. IRS.gov
Key Rules or Details for 2019
Several important rules governed Form 1099-SB for the 2019 tax year. First and foremost, not every life insurance transfer triggers this form—only ""reportable policy sales"" and transfers to foreign persons require reporting. The insurance company must file a separate Form 1099-SB for each seller involved in such a transaction.
The form reports two critical amounts in its two boxes. Box 1 shows your ""investment in the contract""—for original policyholders, this means all premiums paid minus any amounts you previously received tax-free. If you weren't the original owner, the insurance company reports what they know or can reasonably estimate about what you paid for the policy and any amounts you received.
Box 2 reports the ""surrender amount""—the amount you would have received if you'd simply surrendered the policy to the insurance company on the date of the sale, rather than selling it to a third party. This figure helps establish a baseline for calculating your gain or loss on the transaction.
Privacy protections allow insurance companies to truncate (mask most digits of) your Social Security number or other taxpayer identification number on the copy you receive, though they must report your complete number to the IRS. Additionally, certain exceptions may excuse insurance companies from filing if another party handles the reporting or if specific circumstances apply, such as transfers involving foreign beneficial owners under particular conditions. IRS.gov
Step-by-Step (High Level)
Understanding how Form 1099-SB fits into the bigger picture helps demystify the process. Here's the typical sequence of events:
Step 1: The Policy Sale Occurs.
You decide to sell your life insurance policy to a third party—perhaps through a life settlement broker. The buyer (called an ""acquirer"") completes the purchase, acquiring ownership rights to your policy.
Step 2: The Acquirer Reports the Transaction.
The acquirer must file Form 1099-LS with the IRS, reporting details about the purchase. They also send a copy to the insurance company that issued your policy.
Step 3: The Insurance Company Receives Notification.
When your insurance company receives the Form 1099-LS (or other notice of a transfer to a foreign person), they know they need to prepare Form 1099-SB. They gather information from their records about your investment in the policy and calculate what the surrender value would have been on the sale date.
Step 4: Form 1099-SB Is Issued.
The insurance company prepares and files Form 1099-SB with the IRS and sends you a copy. This must happen by January 31 for your copy and by late February (or late March for electronic filing) for the IRS copy.
Step 5: You Report on Your Tax Return.
When preparing your tax return, you use the information from Form 1099-SB, along with the actual amount you received from the sale (shown on Form 1099-LS from the buyer), to calculate your taxable gain or loss. The difference between what you received and your investment in the contract generally represents your taxable income from the sale.
Common Mistakes and How to Avoid Them
Even with straightforward forms, mistakes happen. Here are the most common pitfalls and how to sidestep them:
Mistake #1: Confusing Form 1099-SB with Form 1099-LS.
These are companion forms but serve different purposes. Form 1099-LS comes from the buyer and shows what they paid you. Form 1099-SB comes from the insurance company and shows your investment and the surrender value. You need both to properly report the transaction. Keep them together and don't assume one replaces the other.
Mistake #2: Ignoring the Form Because Amounts Seem Small.
Some sellers think if their investment was minimal, they can skip reporting. Wrong. The IRS receives a copy of your Form 1099-SB, and if you don't report the transaction, their computers will flag the mismatch. Always report what's on the form, even if the tax impact seems negligible.
Mistake #3: Using the Wrong Amount to Calculate Gain.
Your taxable gain isn't simply the surrender amount minus your investment. You must use the actual amount you received from the buyer (from Form 1099-LS), not the surrender amount on Form 1099-SB. The surrender amount helps establish your basis but isn't what you actually received.
Mistake #4: Failing to Update Records After a Rescission.
If your policy sale falls through and you receive a corrected Form 1099-SB showing zeros or indicating the transaction was canceled, make sure this correction reaches your tax preparer. Filing based on an original form for a canceled transaction creates problems.
Mistake #5: Not Keeping Copies with Supporting Documents.
Save Form 1099-SB along with Form 1099-LS, your policy documents, and records of all premiums paid. The IRS recommends keeping tax records for at least three years, but for complex transactions like policy sales, keeping records longer provides valuable protection if questions arise.
What Happens After You File
Once the insurance company files Form 1099-SB with the IRS and sends you your copy, the information enters the tax system's matching program. The IRS will eventually compare what the insurance company reported against what you report on your tax return.
For most people, nothing dramatic happens—you report the transaction correctly, and the matter is settled. The amounts on Form 1099-SB help you calculate the taxable portion of your policy sale proceeds. Depending on how long you owned the policy and your total gain, this might be taxed as ordinary income or partially as capital gain.
If there's a discrepancy—say, the IRS sees a Form 1099-SB in your name but you didn't report the income—you'll likely receive a notice several months (or even a year or more) after filing. These computer-generated notices propose adjustments to your return and calculate additional tax, interest, and possibly penalties. You'll have an opportunity to respond, explain the discrepancy, or provide documentation showing you did report correctly.
For insurance companies, the consequences of failing to file or filing incorrectly can include penalties. That's why most insurance companies have systems in place to track these reportable transactions and ensure timely, accurate filing.
FAQs
Q1: I sold my life insurance policy in 2019 but never received Form 1099-SB. What should I do?
Contact the insurance company immediately. They may have your incorrect address, or there might have been a filing error. If you can't get the form and the deadline is approaching, you should still report the transaction using your own records. Attach a statement explaining you didn't receive the form and show your calculations. You can also request a ""transcript"" from the IRS after filing season to see if they received a 1099-SB in your name.
Q2: Does receiving Form 1099-SB mean I automatically owe taxes?
Not necessarily. Whether you owe taxes depends on whether you have a gain. If you sold the policy for more than your investment (the amount in Box 1), you'll typically have taxable income. But if you sold for less, you might have a loss. Additionally, some portions might be tax-free depending on your specific circumstances. Consult a tax professional to determine your exact tax liability.
Q3: I transferred my policy to my spouse. Will I get a Form 1099-SB?
Generally, no. Transfers to family members with substantial family relationships aren't ""reportable policy sales"" under the tax rules. Form 1099-SB is specifically for sales to third parties who don't have substantial family, business, or financial relationships with the insured person.
Q4: Can I use tax software to report this, or do I need a professional?
Life insurance policy sales are complex transactions. While some advanced tax software can handle them, you'll need to carefully input information from both Form 1099-LS and Form 1099-SB. Many tax professionals recommend working with a CPA or enrolled agent for policy sale transactions, especially for your first time, to ensure proper reporting and maximize tax benefits.
Q5: The amount in Box 1 seems wrong based on what I paid in premiums. What should I do?
Contact the insurance company first to discuss the discrepancy. They may have records you don't, or there might be an error. Remember that Box 1 is net of any amounts you previously received from the policy tax-free, like loans or partial surrenders. If you genuinely believe it's incorrect and the company won't correct it, keep detailed records of your actual premiums paid and work with a tax professional to report the correct basis on your return with an explanatory attachment.
Q6: I received a corrected Form 1099-SB after filing my return. Now what?
If the correction changes your tax liability, you should file an amended return using Form 1040-X. If the correction doesn't affect your taxes (perhaps because you already used the correct numbers), you may not need to amend, but keep the corrected form with your records. When in doubt, consult a tax professional.
Q7: Does Form 1099-SB apply to term life insurance policies?
It can, but it's much more common with permanent policies (whole life, universal life) that have cash value. Term policies rarely have surrender value or secondary market value, so they're seldom sold to third parties. If you do sell a term policy (which would be unusual), and it qualifies as a reportable policy sale, Form 1099-SB would apply.
Sources
Sources: All information is based on official IRS guidance, including the Instructions for Form 1099-SB (Rev. December 2019) and the About Form 1099-SB page at IRS.gov.
