Form 1099-SB: Seller's Investment in Life Insurance Contract (2022)

What the Form Is For

Form 1099-SB is an information return that reports how much you invested in a life insurance policy when it's sold or transferred under specific circumstances. Think of it as a tax receipt that documents your financial stake in a life insurance contract at the time of transfer.

The form is issued by life insurance companies (called ""issuers"" in IRS terminology) to report two key dollar amounts: your total investment in the contract and what the surrender value would have been if you had cashed it in on that date. These figures become crucial for calculating whether you owe taxes on the transaction and, if so, how much.

This reporting requirement emerged from the Tax Cuts and Jobs Act of 2017, which created new rules for tracking life insurance policy sales. Congress wanted to ensure proper tax reporting when people sell their life insurance policies to investors—transactions known as ""reportable policy sales."" These sales typically happen in the life settlement market, where investors purchase policies from individuals who no longer need or want their coverage.

You'll receive Form 1099-SB if you sold your life insurance policy to someone who has no substantial family, business, or financial relationship with the insured person (other than simply owning the policy). The form also applies if you transfer your policy to a foreign person. The insurance company sends you Copy B and files the information with the IRS, ensuring everyone has the same baseline numbers for tax purposes.

When You’d Use It (Late and Amended Filing)

Most people receive Form 1099-SB by January 31 of the year following the policy transfer. The insurance company files the form with the IRS by February 28 (paper filing) or March 31 (electronic filing). You'll use the information on this form when preparing your federal income tax return for the year the sale or transfer occurred.

Late Filing: If you didn't receive your Form 1099-SB by mid-February, first contact the insurance company's information contact person listed on any previous correspondence. Under IRS rules, the issuer must provide direct access to someone who can answer questions about the form. If you still can't obtain the form, you should still report the transaction on your tax return using your own records of premiums paid and any amounts you received back from the policy over the years.

Amended Returns: Certain situations require the insurance company to issue a corrected Form 1099-SB. The most common scenario involves rescission—when a policy sale falls through and gets cancelled. If the sale is rescinded after the insurance company has already filed Form 1099-SB, they must file a corrected version within 15 calendar days of learning about the rescission. You would then need to file an amended return (Form 1040-X) if you've already reported the transaction on your original return. Other reasons for corrections include errors in reporting your investment amount, incorrect surrender values, or wrong taxpayer identification numbers.

If you discover an error on your Form 1099-SB after filing your return, contact the issuer immediately to request a corrected form. Keep documentation of all communications. Depending on when you catch the error and whether it affects your tax liability, you may need to file Form 1040-X to amend your return within three years of the original filing deadline.

Key Rules for 2022

The 2022 tax year marked one of the early years these forms were in widespread use, following the effective date of December 31, 2017, for reportable policy sales. Several important rules governed Form 1099-SB reporting in 2022:

Who Must File: Insurance companies must file Form 1099-SB when they receive a Form 1099-LS (Reportable Life Insurance Sale) from the buyer—the ""acquirer""—or when they receive notice that a policy was transferred to a foreign person. The issuer responsible for administering the contract (collecting premiums and paying benefits) bears the primary filing responsibility.

Separate Forms Required: The insurance company must file a separate Form 1099-SB for each seller involved in a transaction. If multiple people owned interests in the same policy and sold their shares, each gets their own form reflecting their individual investment.

Definition of Reportable Policy Sale: The transaction qualifies as reportable when someone acquires an interest in a life insurance contract without having a substantial family, business, or financial relationship with the insured person. This typically excludes sales to family members, business partners, or companies with existing financial ties to the insured. However, sales to investors, life settlement companies, or trusts established specifically to purchase policies generally do qualify as reportable.

Investment Calculation Method: For original policyholders, the investment equals all premiums paid minus any tax-free amounts received back (like dividends or partial withdrawals). For subsequent owners, the insurance company reports what they know or can reasonably estimate based on premiums the current owner paid, minus amounts they received. The issuer isn't expected to have complete historical information for every owner in the chain of ownership.

Surrender Amount Reporting: The form must show what the seller would have received if they'd surrendered the policy to the insurance company on the date of the reportable sale or transfer. This figure serves as a baseline for tax calculations, even though the seller actually received a different amount from the buyer.

Step-by-Step (High Level)

Understanding Form 1099-SB requires knowing the sequence of events that triggers its creation:

Step 1 – Policy Sale or Transfer Occurs: You sell your life insurance policy to a buyer (acquirer) or transfer it to a foreign person. This might happen through a life settlement broker, directly to a settlement company, or in another qualified transaction.

Step 2 – Acquirer Reports to Insurance Company: The buyer who purchased your policy completes Form 1099-LS (Reportable Life Insurance Sale) and sends it to the insurance company. This form notifies the issuer about the transaction and provides key details including the sale date and the parties involved. Alternatively, if you transferred your policy to a foreign person, the insurance company may receive other notice of the transfer.

Step 3 – Insurance Company Gathers Information: Upon receiving notification, the issuer retrieves your policy records and calculates two critical figures. First, they determine your investment in the contract by reviewing all premiums paid and any amounts previously received back. Second, they calculate what the cash surrender value would have been on the transfer date.

Step 4 – Form 1099-SB Is Prepared and Filed: The insurance company completes Form 1099-SB with your information—name, address, Social Security number, policy number, investment amount (Box 1), and surrender amount (Box 2). They file the form with the IRS and send Copy B to you by January 31 of the following year.

Step 5 – You Use It for Your Tax Return: When preparing your federal income tax return, you'll use the Form 1099-SB information along with other documentation about what you actually received from the buyer. The difference between what you received and your investment (shown in Box 1) determines whether you have taxable gain. The surrender amount (Box 2) helps calculate whether any gain should be taxed as ordinary income versus capital gain.

Common Mistakes and How to Avoid Them

Mistake #1: Ignoring the Form Because You Didn't Receive Cash Directly from the Insurance Company
Many people mistakenly believe Form 1099-SB doesn't apply to them because they received money from a settlement company, not the insurer. The form isn't reporting what you actually received—it's reporting baseline information the IRS needs to verify proper taxation. Solution: Always report life insurance policy sales on your tax return and use Form 1099-SB as one of several documents in your tax reporting.

Mistake #2: Confusing Investment Amount with Sale Price
Box 1 shows your investment (essentially your cost basis), not what you received from the buyer. Some taxpayers mistakenly think the form is reporting their proceeds. Solution: Understand that Form 1099-SB provides reference information. Your actual proceeds come from the settlement agreement with the buyer. You'll need both numbers to calculate your taxable gain.

Mistake #3: Assuming All Life Insurance Proceeds Are Tax-Free
While death benefits paid to beneficiaries are generally tax-free, selling your policy during your lifetime creates a taxable event. The tax treatment differs significantly from a death benefit. Solution: Recognize that policy sales have tax consequences. Any amount you receive above your investment (Box 1) is potentially taxable income.

Mistake #4: Not Keeping Personal Records
Some sellers rely entirely on the insurance company's investment calculation without maintaining their own documentation of premiums paid. For subsequent owners (not the original policyholder), the issuer may not have complete information. Solution: Maintain detailed records of all premiums you paid, any loans taken, dividends received, and partial withdrawals. Your records may be more complete than the insurer's, especially if the policy changed hands multiple times.

Mistake #5: Failing to Report When Form 1099-SB Never Arrives
If you sold your policy but never received Form 1099-SB, you might think you don't need to report the transaction. The IRS still expects reporting whether or not you received the form. Solution: Report the sale using your own documentation. If necessary, contact the insurance company to request your form or the underlying information.

Mistake #6: Not Understanding Rescission Rules
If your policy sale falls through and gets rescinded after you've reported it on your tax return, you must file an amended return using the corrected Form 1099-SB. Solution: If a sale is cancelled, work with your tax professional to properly amend your return and avoid paying taxes on a transaction that never actually completed.

What Happens After You File

After you receive Form 1099-SB and report the policy sale on your tax return, the IRS has the information it needs to verify your reporting. Here's what you can expect:

IRS Matching Program: The IRS electronically matches the information on your tax return against the Form 1099-SB filed by the insurance company. If your return shows a life insurance policy sale and the numbers align with the reported investment amount, your return processes normally. Discrepancies may trigger correspondence from the IRS asking for clarification.

Tax Liability Determination: Your tax obligation depends on the difference between what you received from the buyer and your investment amount (Box 1). If you sold the policy for more than your investment, you'll owe taxes on the gain. The portion of gain up to the surrender amount (Box 2) is typically taxed as ordinary income at your regular tax rate. Any excess gain beyond the surrender amount may qualify for capital gains treatment at potentially lower rates.

Record Retention: Keep your Form 1099-SB with your other tax records for at least three years from the date you filed your return, or two years from when you paid the tax, whichever is later. In practice, keeping these records longer is advisable, especially if the policy sale was complex or involved significant dollar amounts.

Future Insurance Company Reporting: If you transferred your policy in a reportable sale, the insurance company maintains reporting obligations beyond Form 1099-SB. When the insured person eventually passes away and the policy pays out, the issuer must file Form 1099-R (Reportable Death Benefits) to report the death benefit payment to the current owner. This creates a complete paper trail of the policy from sale through ultimate payout.

State Tax Implications: While Form 1099-SB is a federal form, most states with income taxes require reporting of life insurance policy sales as well. Check your state's specific requirements, as some states may tax these transactions differently than the federal government.

FAQs

Q1: Do I receive Form 1099-SB if I surrender my policy directly to the insurance company for cash?

No. Form 1099-SB only applies to reportable policy sales (where you sell to a third party without substantial family, business, or financial relationship with the insured) or transfers to foreign persons. If you surrender directly to the insurance company, you may receive Form 1099-R instead, which reports the surrender proceeds and tax consequences.

Q2: What if the investment amount in Box 1 seems incorrect?

Contact the insurance company's information contact person immediately. Request a detailed breakdown of how they calculated the figure. If the issuer made an error, they must file a corrected Form 1099-SB. If you're a subsequent owner (not the original policyholder), remember that the issuer reports only what they know or can reasonably estimate—their records may be incomplete for prior owners.

Q3: Can I receive more than one Form 1099-SB for the same policy?

Yes, if you owned only a partial interest in the policy. Each co-owner who sells their interest receives a separate Form 1099-SB reflecting their individual investment and their portion of the surrender value. Additionally, if you sold multiple policies, you'll receive a separate form for each policy.

Q4: Why does Box 2 show a surrender amount when I didn't actually surrender the policy?

The surrender amount is a reference point for tax calculation purposes. It represents what you would have received if you'd surrendered the policy to the insurance company on the sale date. This figure helps determine how much of your gain is ordinary income versus potential capital gain. You didn't receive this amount—you received the negotiated sale price from the buyer.

Q5: How does Form 1099-SB differ from Form 1099-LS?

Form 1099-LS is filed by the buyer (acquirer) who purchased your policy and reports the actual amount paid to you. Form 1099-SB is filed by the insurance company and reports your investment in the policy and the hypothetical surrender value. Both forms report different information, and together they give the IRS a complete picture of the transaction.

Q6: What happens if I sold my policy to a family member?

Sales to family members typically don't qualify as reportable policy sales because family members have substantial family relationships with the insured. Therefore, the insurance company wouldn't file Form 1099-SB for such transactions. However, tax consequences may still apply, and you should consult with a tax professional about proper reporting.

Q7: Are there penalties for not reporting information from Form 1099-SB?

If you fail to report the policy sale and resulting income on your tax return, you may face accuracy-related penalties, interest on unpaid taxes, and in serious cases, prosecution for tax evasion. Even if you didn't receive Form 1099-SB, you're still legally required to report the transaction. The IRS can assess penalties of 20% or more of the underpaid tax amount for negligence or substantial understatement of income.

Sources

All information in this guide comes from official IRS sources, including the Form 1099-SB instructions, About Form 1099-SB, and related Treasury Regulations under Section 6050Y of the Internal Revenue Code.

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