Form 1099-LS: Reportable Life Insurance Sale – A Complete Guide (2022)

If you've sold your life insurance policy to someone other than a family member or close business partner, you'll likely encounter Form 1099-LS. This somewhat obscure tax form tracks a growing trend: people selling their life insurance policies for cash. Understanding this form helps you avoid tax surprises and stay compliant with IRS requirements.

What Form 1099-LS Is For

Form 1099-LS (Reportable Life Insurance Sale) is an information return used to report the sale or transfer of life insurance contracts in what the IRS calls a "reportable policy sale." Think of it as the IRS's way of tracking when life insurance policies change hands in transactions that aren't typical family transfers. IRS.gov

A reportable policy sale occurs when you sell or transfer your interest in a life insurance policy to someone who has no substantial family, business, or financial relationship with the insured person—beyond just owning that policy. This typically happens in the life settlement industry, where investors purchase policies from seniors who no longer need the coverage but want immediate cash. IRS.gov

The acquirer (the buyer or investor) must file this form with the IRS and provide copies to both you (the seller) and the insurance company. The form reports how much you received from the sale and when the transaction occurred. This information helps the IRS ensure that any taxable gain from the sale is properly reported on your income tax return.

When You’d Use Form 1099-LS (Late/Amended Filings)

Form 1099-LS follows standard information return deadlines. For the 2022 tax year, acquirers must send copies to sellers by January 31, 2023, and file with the IRS by February 28, 2023 (paper) or March 31, 2023 (electronic). Most filers with 10 or more forms are required to file electronically.

If you're an acquirer who missed the deadline, you can request an automatic 30-day extension using Form 8809. However, you must submit this extension request by the original due date to qualify. Under certain hardship conditions, you may apply for an additional 30-day extension, though this requires detailed justification.

Amended returns become necessary if information on the original Form 1099-LS was incorrect. Perhaps the payment amount was wrong, or the wrong policy number was listed. File a corrected Form 1099-LS by checking the "CORRECTED" box on the form and entering the correct information. You must also furnish a corrected copy to the recipient.

Rescission situation: If a reportable policy sale is rescinded (the deal falls through and is reversed), the acquirer must file a corrected Form 1099-LS within 15 calendar days of receiving notice of the rescission. This also applies to furnishing corrected statements to recipients. IRS.gov

For sellers who didn't receive their Form 1099-LS by mid-February, contact the acquirer first. If that doesn't resolve the issue, you're still responsible for reporting the sale on your tax return, even without the form. The IRS receives copies of all 1099 forms and cross-checks them against tax returns.

Key Rules or Details for 2022

Several important rules governed Form 1099-LS reporting for 2022 transactions:

Who Must File

The acquirer (buyer) files the form—not the seller. An acquirer is anyone who purchases an interest in a life insurance policy in a reportable policy sale, either directly or indirectly through partnerships, trusts, or other entities. The acquirer may not have to file if they received the policy through a gift, qualify for certain exceptions, or if another party reports on their behalf under unified reporting provisions.

Who Receives Payment

The form must be filed for each "payment recipient," which includes the seller and any brokers or intermediaries who retained at least $600 from the transaction proceeds. If multiple parties split the proceeds, separate forms may be required for each recipient meeting the threshold.

Direct Acquisition Reporting

When the acquirer directly purchases the policy from the seller, they must furnish Form 1099-LS copies to both the payment recipient (seller) and the insurance company issuer. The copy sent to the issuer helps the company track policy ownership changes. However, indirect acquisitions may have different requirements.

Taxpayer Identification Numbers

The acquirer must collect and report accurate TINs (Social Security numbers or Employer Identification Numbers) for all payment recipients. The acquirer's TIN must also appear on the form. Failure to provide correct TINs can result in backup withholding requirements.

Exceptions

You don't file Form 1099-LS for transfers to family members with substantial relationships to the insured, business partners with legitimate business interests in the policy, or certain section 1035 exchanges (tax-free policy exchanges). Foreign persons may also qualify for exceptions under certain circumstances. IRS.gov

Step-by-Step (High Level)

For acquirers filing Form 1099-LS, follow these general steps:

Step 1: Determine if filing is required.

Confirm that your acquisition meets the definition of a reportable policy sale. If the seller has no substantial family, business, or financial relationship with the insured person (beyond this policy transaction), reporting is likely required.

Step 2: Gather necessary information.

Collect the payment recipient's name, address, and TIN. Obtain the insurance policy number and issuer information. Document the exact payment amount and transaction date. Verify all information for accuracy before proceeding.

Step 3: Complete the form.

Fill out Form 1099-LS with your information as the acquirer in the designated "Payer" boxes. Enter the payment recipient's information in the "Recipient" boxes. Complete Box 1 (amount paid to recipient) and Box 2 (date of sale). Include the issuer's name and policy number in the designated areas.

Step 4: File with the IRS.

For paper filing, send Copy A to the IRS Service Center for your location along with Form 1096 (Annual Summary and Transmittal). For electronic filing (required if filing 10 or more forms), use the IRS FIRE (Filing Information Returns Electronically) system. Electronic filers don't submit Form 1096.

Step 5: Furnish recipient copies.

Provide Copy B to the payment recipient (seller) by January 31. If required, send Copy C to the insurance company issuer by the same deadline. These statements allow recipients to properly report the transaction on their own tax returns.

Step 6: Retain your records.

Keep Copy C or an electronic equivalent for your records. The IRS recommends retaining these records for at least four years in case of questions or audits. IRS.gov

Common Mistakes and How to Avoid Them

Mistake 1: Not filing when required.

Some acquirers mistakenly believe that family relationships between the seller and insured automatically exempt them from filing. However, the relationship must be "substantial" based on facts and circumstances. When in doubt, consult the regulations or a tax professional rather than assuming an exception applies.

Mistake 2: Incorrect or missing TINs.

Reporting the wrong Social Security number or EIN is one of the most common errors. Always use Form W-9 to collect TINs directly from payment recipients before the transaction closes. Consider using the IRS TIN Matching program to verify accuracy before filing. Incorrect TINs can trigger backup withholding requirements and IRS penalty notices.

Mistake 3: Failing to report to all required parties.

In direct acquisitions involving sellers, you must furnish statements to both the seller AND the insurance company issuer. Forgetting the issuer copy is a frequent oversight. Only indirect acquisitions may skip the issuer reporting requirement.

Mistake 4: Wrong payment amounts.

Box 1 should reflect the total amount paid to that specific payment recipient—not the entire policy purchase price if multiple parties received proceeds. If a broker retained $10,000 and the seller received $90,000, each gets a separate form showing their respective amounts (assuming the broker's amount exceeds $600).

Mistake 5: Missing the electronic filing threshold.

The threshold for mandatory e-filing dropped to 10 forms for returns filed after January 1, 2024. For 2022 returns filed in 2023, the threshold was 250 forms. Know the current requirement and ensure your filing method complies.

Mistake 6: Not reporting rescissions promptly.

If the sale falls through, you have only 15 calendar days from receiving rescission notice to file corrected forms. This short deadline is easy to miss, but failing to meet it can result in penalties.

What Happens After You File

After you file Form 1099-LS, several things occur:

For Acquirers

The IRS receives your filing and includes it in its information matching system. If you filed electronically, you'll receive acknowledgment of acceptance or rejection typically within 24-48 hours. Paper filers don't receive confirmation unless there's a problem. Keep copies of everything you filed as proof of compliance.

The IRS may send correction notices (CP2100 or CP2100A) if reported TINs don't match IRS records. These notices identify problematic forms and require you to solicit corrected TINs from recipients. Future Forms 1099-LS for those recipients may require backup withholding if correct TINs aren't obtained.

For Sellers (Payment Recipients)

After receiving Form 1099-LS, you must report the policy sale on your personal income tax return. The tax treatment depends on your specific situation. You'll need Form 1099-SB (Seller's Investment in Life Insurance Contract) from the insurance company to calculate your "basis"—essentially what you paid into the policy through premiums.

Generally, any proceeds exceeding your basis are taxable. Gains up to the policy's cash surrender value are taxed as ordinary income, while amounts exceeding cash value may qualify for capital gains treatment. Report ordinary income in the "Other Income" section of Form 1040 and capital gains on Schedule D.

For Insurance Companies

Receiving Copy C alerts the issuer that ownership changed. This helps them track who should receive death benefits and prevents future administrative confusion. Issuers must also file Form 1099-SB to report the seller's investment in the contract, completing the reporting chain. IRS.gov

FAQs

1. Do I have to pay taxes on the money I received for selling my life insurance policy?

Most likely, yes—at least partially. If you received more than you paid in premiums (your basis), the excess is taxable. The portion up to the policy's cash surrender value is taxed as ordinary income, while amounts above cash value may qualify as capital gains. However, if you sold the policy for less than you paid in, you might have a non-deductible loss. Consult a tax professional for your specific situation.

2. I'm the seller—why do I need this form?

Form 1099-LS provides essential information for filing your tax return. It shows when the sale occurred and how much you received. Combined with Form 1099-SB (which shows your basis), you can calculate your taxable gain. The IRS receives copies of these forms and will expect to see the transaction reported on your Form 1040.

3. What if I didn't receive Form 1099-LS but sold my policy?

Contact the acquirer immediately to request your copy. If you can't obtain it, you're still legally required to report the sale. Use your records of the transaction amount, date, and policy details. Estimate your basis using premium payment records and any cash value information from the insurance company. It's better to report based on available information than to omit the transaction entirely.

4. Can the acquirer truncate my Social Security number on the copy they send me?

Yes. IRS regulations allow filers to truncate recipient TINs on statements furnished to recipients (Copy B), showing only the last four digits of your SSN. However, the full SSN must appear on forms filed with the IRS. The acquirer's TIN cannot be truncated anywhere.

5. What penalties apply for not filing Form 1099-LS?

Acquirers who fail to file face penalties ranging from $60 to $310 per form (for 2022), depending on how late the filing is. The penalty increases for intentional disregard, with a minimum of $660 per form or 10% of the reportable amount. There's no maximum penalty for intentional disregard. Separate penalties apply for failing to furnish recipient statements.

6. Are there situations where I acquired a policy but don't need to file Form 1099-LS?

Yes. Exceptions include: receiving the policy as a gift (gratuitous transfer), acquiring it through a tax-free section 1035 exchange, having a substantial family/business/financial relationship with the insured, or being a foreign person meeting certain criteria. Additionally, if another acquirer or third-party contractor reports on your behalf under unified reporting provisions, you may not need to file separately.

7. How do I know if my relationship with the insured is "substantial" enough to avoid reporting?

The regulations don't provide a bright-line test. Factors include close family relationships (spouses, parents, children), business partnerships where the insured's death would significantly impact your business operations, or financial arrangements independent of the policy itself. Distant relatives, mere friendship, or business relationships created solely to acquire the policy likely don't qualify. When uncertain, err on the side of filing or seek professional advice.

Additional Resources

Sources: This guide is based on official IRS publications, including the Instructions for Form 1099-LS, About Form 1099-LS, and the 2022 General Instructions for Certain Information Returns, all available at IRS.gov.

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