Form 1099-SB: Seller's Investment in Life Insurance Contract (2021)

When someone sells a life insurance policy to a third party (not the insurance company), it triggers specific tax reporting requirements. Form 1099-SB is the IRS document that helps track these transactions, specifically reporting how much the seller had invested in the policy. While this form might seem complicated at first glance, understanding its purpose and requirements can help you navigate what's known as a "reportable policy sale" with confidence.

What Form 1099-SB Is For

Form 1099-SB exists to report the seller's investment amount in a life insurance contract that has been sold or transferred in what the IRS calls a "reportable policy sale" or transferred to a foreign person. Think of it as a receipt that documents your basis—the amount you've put into the policy minus what you've received from it over the years.

Here's what makes a transaction reportable: In general, a reportable policy sale occurs when someone acquires a life insurance policy (or an interest in one) and that buyer has no substantial family, business, or financial relationship with the insured person—apart from owning the policy itself. This commonly happens in the life settlement industry, where investors purchase policies from policyholders who no longer need or want their coverage. The form is filed by the life insurance company (the issuer), not by you as the seller, but you'll receive a copy showing two critical numbers: your investment in the contract and what the surrender value would have been on the date of sale.

The "investment in contract" (Box 1) represents the total premiums you paid, minus any amounts you received tax-free from the policy over the years. The "surrender amount" (Box 2) shows what you would have received if you had simply surrendered the policy back to the insurance company on that date, rather than selling it to a third party. These figures help you and the IRS calculate the taxable portion of your policy sale. IRS.gov

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

As the seller of a life insurance policy, you won't typically file Form 1099-SB yourself—the insurance company does that. However, if you're an insurance company issuer, understanding when and how to file corrections is crucial.

The form is generally due to the IRS by February 28, 2022 (for paper filing) or March 31, 2022 (for electronic filing) for transactions occurring in 2021. The seller must receive their copy (called the "statement to seller") by February 15, 2022. There's a special exception: if the insurance company receives notice of a transfer to a foreign person after January 31, 2022, they have 30 days from receiving that notice to furnish the statement to the seller.

Corrected or Amended Returns

Mistakes happen, and the IRS has clear procedures for fixing them. If you need to file a corrected return, the process depends on the type of error. For simple mistakes like incorrect dollar amounts (Error Type 1), prepare a new form, check the "CORRECTED" box at the top, fix the error, and submit it with a new Form 1096 transmittal. For more serious errors like wrong taxpayer identification numbers or names (Error Type 2), you'll need to file two forms: first, a corrected return showing zeros in all money fields to void the original, then a new return with all correct information as if it were an original filing.

Special Rescission Rule

If a reportable policy sale gets canceled or rescinded, insurance companies must file a corrected Form 1099-SB within 15 calendar days of learning about the rescission. This quick turnaround ensures accurate tax records for all parties involved. IRS.gov

Key Rules for 2021

Several important rules governed Form 1099-SB filings for the 2021 tax year:

• Who Must File: Insurance companies (issuers) must file when they receive either (1) a statement from the buyer (acquirer) in a reportable policy sale, such as a copy of Form 1099-LS (Reportable Life Insurance Sale), or (2) notice from a non-issuer source that a life insurance contract has been transferred to a foreign person. An insurance company in this context includes any entity that bears risk under the policy or is responsible for administering it—collecting premiums and paying death benefits.
• Separate Forms Required: You must file a separate Form 1099-SB for each seller involved in a reportable policy sale. You cannot combine multiple sellers onto one form, even if they sold interests in the same policy.
• Electronic Filing Threshold: For 2021, if you were filing 250 or more information returns of any type (not just Form 1099-SB), you were required to file electronically. You could not submit paper returns once you crossed that threshold.
• Investment Calculation: For the original policyholder, the investment amount is straightforward: total premiums paid minus any amounts received tax-free. For subsequent owners (people who bought the policy from someone else), the calculation becomes an "estimate of investment" based on what the insurance company knows or can reasonably estimate—essentially, the premiums that person paid minus any amounts they received.
• Exceptions: Not every transaction requires filing. Insurance companies may qualify for exceptions if the seller is a foreign beneficial owner, if they received notice of a transfer to a foreign person but no written statement reporting it as a reportable policy sale, or if they received a statement about a Section 1035 exchange (a tax-free policy exchange) that was incorrectly reported as a reportable policy sale. IRS.gov

Step-by-Step (High Level)

For insurance companies filing Form 1099-SB, here's the basic process:

Step 1: Determine if Filing Is Required

Review whether you've received a Form 1099-LS from an acquirer or notice of a transfer to a foreign person. Check if any exceptions apply to your situation.

Step 2: Gather Required Information

Collect the seller's full name, address, and taxpayer identification number (Social Security Number or Employer Identification Number). Obtain the policy number, calculate the seller's investment in the contract, and determine the surrender amount as of the sale or transfer date.

Step 3: Complete the Form

Fill out Form 1099-SB with all required fields. Box 1 reports the investment in contract amount, and Box 2 reports the surrender amount. Include your company's information (as the issuer), contact details, and taxpayer ID number.

Step 4: Prepare Form 1096

Complete Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) as your cover sheet if filing on paper. This form accompanies Copy A of all your 1099-SB forms. Remember: you must file a separate Form 1096 for each type of information return (don't mix 1099-SB with other 1099 types under one Form 1096).

Step 5: File with the IRS

Submit Copy A to the appropriate IRS Submission Processing Center by the deadline—February 28 for paper returns or March 31 for electronic returns (for 2021 transactions). If filing electronically, use the IRS Filing Information Returns Electronically (FIRE) system.

Step 6: Furnish Copy to Seller

Provide Copy B to the seller by February 15, 2022 (generally), or within 30 days of receiving notice for foreign transfers that come in late. This statement helps the seller properly report their gain or loss on their personal tax return. IRS.gov

Common Mistakes and How to Avoid Them

Filing Form 1099-SB accurately matters because penalties for errors can add up quickly. Here are the most common pitfalls and how to steer clear of them:

• Duplicate Filing: Don't submit the same information more than once. If you're unsure whether you've already filed, check your records carefully before resubmitting. Duplicate filings create confusion and may trigger unnecessary IRS inquiries.
• Mismatched Information: Ensure your company name, address, and TIN on Form 1099-SB exactly match what appears on Form 1096. Inconsistencies between these forms often result in processing delays or rejection.
• Missing Decimal Points: Always include decimal points in money amounts. Write $1,230.00, not 1230. This seemingly small detail prevents amounts from being read incorrectly during processing.
• Wrong Form Type with Wrong Transmittal: Never combine different types of 1099 forms under a single Form 1096. If you're filing both Forms 1099-SB and 1099-INT, prepare separate Form 1096 transmittals for each type.
• Special Characters in Money Fields: Don't use dollar signs, commas, asterisks, or ampersands in monetary amount boxes. Simply enter the numbers with the decimal point: 15000.00, not $15,000.00.
• Using Wrong Year Forms: Always use the correct year form for the year being reported. Forms are designed for specific tax years and using outdated or future-year forms causes processing problems because the IRS scans these documents.
• Cutting Forms Apart: When forms are printed multiple to a page, submit the entire page—even if you've only completed one form. Don't cut or separate these pages.
• Stapling: Never staple forms together or to Form 1096. Staples interfere with IRS scanning equipment.
• Incorrect TIN Reporting: Double-check all taxpayer identification numbers. TIN errors trigger one of the highest penalty categories because they prevent the IRS from matching information to the correct taxpayer.
• Late Filing Without Reasonable Cause: File on time. If you miss the deadline, file as soon as possible and be prepared to explain reasonable cause if you want penalty relief. The longer you wait, the higher the penalty tier. IRS.gov

What Happens After You File

Once Form 1099-SB is properly filed, the information flows through the tax system in several ways:

• IRS Processing: The IRS receives your filing and processes it through their information return system. They use the data to cross-check against individual tax returns. If a seller reports a life insurance policy sale on their personal tax return (typically on Form 8949 and Schedule D for capital gains), the IRS compares those figures against your reported investment and surrender amounts.
• Seller's Tax Obligations: The seller uses the information from Form 1099-SB to calculate their taxable gain or loss. Generally, they'll report the difference between what they received from the buyer and their investment in the contract (Box 1). The transaction usually generates a capital gain or ordinary income, depending on the specifics. The surrender amount (Box 2) provides context but isn't directly used in most calculations—it shows what they gave up by selling to a third party rather than surrendering to the insurance company.
• Penalty Assessments: If you filed incorrectly or late, the IRS may assess penalties automatically through their system. For 2021 filings:
  • $60 per form if corrected within 30 days (maximum $683,000, or $239,000 for small businesses)
  • $130 per form if corrected after 30 days but by August 1 (maximum $2,049,000, or $683,000 for small businesses)
  • $340 per form if filed after August 1 or not filed at all (maximum $4,098,500, or $1,366,000 for small businesses)
  • Minimum $680 per form with no maximum if the IRS determines you intentionally disregarded filing requirements
• Recordkeeping: Keep copies of all filed Forms 1099-SB, Forms 1096, and related documentation for at least three years. These records help if the IRS has questions or if a seller contacts you about their copy.
• Ongoing Monitoring: If you're an active issuer in the life settlement market, expect to file Forms 1099-SB regularly. Building strong systems for tracking reportable policy sales, maintaining seller information, and calculating investment amounts accurately will save time and reduce errors over multiple tax years. IRS.gov

FAQs

Q1: I sold my life insurance policy in 2021. Do I need to file Form 1099-SB?

No. As the seller, you don't file Form 1099-SB—your insurance company does. You should receive Copy B of the form from them by February 15, 2022 (or within 30 days of notice for foreign transfers). Use the information on that form to report the sale on your personal income tax return. If you haven't received your copy and it's past the deadline, contact your insurance company directly.

Q2: What's the difference between a reportable policy sale and simply surrendering my policy back to the insurance company?

A reportable policy sale occurs when you sell your policy to a third party (like a life settlement company or investor) who has no substantial family, business, or financial relationship with the insured person. When you surrender a policy directly back to the insurance company for its cash value, that's not a reportable policy sale—it's a policy surrender, reported differently for tax purposes. Form 1099-SB applies only to reportable policy sales and transfers to foreign persons.

Q3: Our company received a Form 1099-LS showing a policy sale, but we've never issued Form 1099-SB before. What should we do?

Don't panic. First, confirm you're actually the issuer responsible for administering the contract (collecting premiums, paying benefits). If you are, you're required to file Form 1099-SB. Review the IRS instructions carefully, gather the seller's information and calculate their investment in the contract and the surrender amount. If you're uncertain about calculations or whether your situation qualifies for an exception, consult with a tax professional who specializes in life insurance taxation or contact the IRS Business and Specialty Tax Line.

Q4: We filed Form 1099-SB but later discovered the policy sale was rescinded. What now?

You must file a corrected Form 1099-SB within 15 calendar days of receiving notice of the rescission. This is one of the fastest correction timelines for any IRS form, so act immediately. Follow the correction procedures for Error Type 1, check the "CORRECTED" box, and show the corrected information. Also furnish a corrected statement to the seller within the same 15-day timeframe.

Q5: Can we truncate the seller's Social Security Number on Copy B that we furnish to them?

Yes. IRS regulations allow you to truncate (abbreviate) the seller's taxpayer identification number on the statement you furnish to them (Copy B). For example, you could show XXX-XX-1234 instead of the full SSN. However, you may never truncate the TIN on Copy A that you file with the IRS—that must show the complete number. Your TIN as the issuer may never be truncated on any copy.

Q6: What if we can't determine the exact investment amount for a seller who bought the policy from someone else years ago?

For sellers who aren't the original policyholders, report an "estimate of investment" based on information you know or can reasonably estimate. Generally, this means the aggregate premiums that seller paid, minus amounts they received from the policy. Your obligation is limited to information you actually know or can reasonably estimate. Document your methodology in case questions arise later. You're not expected to have perfect records of transactions before the policy came to your attention.

Q7: We have 280 different types of information returns to file for 2021. Do we need to file all of them electronically?

Yes. The 250-return threshold applies to the aggregate of all information return types, not to each form type separately. Since your total exceeds 250, you must file all of them electronically, including Forms 1099-SB. Paper filing is not an option once you cross that threshold, regardless of how many of each specific form type you have.

Sources: All information in this guide comes directly from official IRS sources, including the Instructions for Form 1099-SB, 2021 General Instructions for Certain Information Returns, and About Form 1099-SB page on IRS.gov.

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