Form 1099-LS: Reportable Life Insurance Sale – A Complete Guide for 2021
What Form 1099-LS Is For
Form 1099-LS is an IRS information return used to report the sale of a life insurance policy in what's called a "reportable policy sale." This form was created as part of the 2017 Tax Cuts and Jobs Act and became effective for transactions occurring after December 31, 2017.
So, what exactly is a reportable policy sale? In simple terms, it's when someone sells their life insurance policy to a buyer who has no substantial family, business, or financial relationship with the insured person—apart from their interest in that policy. The most common example is a life settlement transaction, where a policyholder (often someone who's elderly or no longer needs their coverage) sells their life insurance policy to an investor or life settlement company for more than the cash surrender value but less than the death benefit.
The form serves three important purposes: First, it helps the IRS track these transactions for tax purposes. Second, it provides the seller with information needed to calculate any taxable gain from the sale. Third, it informs the insurance company that the policy has changed hands so they can update their records about who will eventually receive the death benefit.
Three parties are typically involved in Form 1099-LS reporting: the acquirer (the buyer of the policy, such as a life settlement company), the payment recipient (usually the seller, but may also include brokers or intermediaries), and the issuer (the life insurance company that administers the policy).
IRS.gov - About Form 1099-LS
When You’d Use Form 1099-LS (Including Late and Amended Filings)
For the 2021 Tax Year
For the 2021 tax year, Form 1099-LS must be filed if you acquired a life insurance contract or any interest in such a contract in a reportable policy sale during 2021. The filing deadlines are strict and vary depending on who's receiving the form:
For Acquirers (Buyers) in 2021
- To the insurance company (issuer): January 18, 2022, at the latest—but potentially earlier if there's a state law rescission period. Specifically, you must file by the later of either 20 calendar days after the sale or 5 calendar days after the end of any applicable state law rescission period, whichever comes first.
- To payment recipients (sellers and any brokers): February 15, 2022
- To the IRS: February 28, 2022 (paper filing) or March 31, 2022 (electronic filing)
Late Filings
Late filings happen when you miss these deadlines. While you should always strive to file on time, if you discover you needed to file after the deadline has passed, you should file as soon as possible to minimize penalties. The IRS imposes graduated penalties based on how late your filing is: $50 per form if corrected within 30 days, $110 if corrected by August 1, and $280 if filed after August 1 or not filed at all. For small businesses, there are annual maximum penalties, but these can still add up quickly.
Amended or Corrected Filings
Amended or corrected filings are necessary when you discover an error after filing the original form. Common reasons include incorrect payment amounts, wrong taxpayer identification numbers, or inaccurate policy information. To file a correction for 2021, you must file a corrected Form 1099-LS, checking the "CORRECTED" box on the form. Submit it to the IRS and provide corrected copies to recipients as soon as you discover the error.
Rescinded Sales
A special situation arises if the sale is rescinded (cancelled). If a reportable policy sale is rescinded after you've filed Form 1099-LS, you have only 15 calendar days from receiving notice of the rescission to file a corrected form with the IRS and furnish corrected statements to recipients.
IRS.gov - Instructions for Form 1099-LS
Key Rules or Details for 2021
Electronic Filing Threshold
Electronic filing threshold: If you filed 250 or more information returns of any type during 2021, you must file Form 1099-LS electronically. This threshold applies collectively to all Forms 1097, 1098, 1099, and W-2G that you file. While the Taxpayer First Act of 2019 authorized the IRS to lower this threshold, for 2021 filings (due in 2022), the 250-return threshold still applied.
Who Must File
Who must file: You must file if you are the acquirer of any interest in a life insurance contract in a reportable policy sale. An acquirer is anyone who purchases an interest in a life insurance policy when they have no substantial family, business, or financial relationship with the insured person (other than their interest in the policy itself). This includes life settlement companies, investment entities, and even indirect acquirers who gain an interest through a partnership, trust, or other entity that holds the policy.
Exceptions to Filing
Exceptions to filing: You may not need to file if the interest was transferred to you gratuitously (as a gift), if you qualify for certain regulatory exceptions (such as being a foreign person under specific circumstances), or if another acquirer or third-party reporting contractor reports on your behalf under unified reporting provisions.
What Must Be Reported
What must be reported: The form requires you to report the acquirer's name, address, and taxpayer identification number (TIN); the name, address, and TIN of each payment recipient; the date of the sale; the insurance issuer's name and the policy number; and the amount paid to each payment recipient. Note that when reporting to the issuer, you don't need to include the payment amount—only the other identifying information.
Coordination with Form 1099-SB
Coordination with Form 1099-SB: When an insurance company receives your Form 1099-LS, they must file Form 1099-SB to report the seller's investment in the contract (essentially, what the seller paid in premiums minus any prior withdrawals). This helps the seller calculate their taxable gain from the sale.
IRS.gov - 2021 General Instructions
Step-by-Step (High Level)
Filing Form 1099-LS involves several sequential steps. Here's how the process typically works:
Step 1: Determine if You Have a Reportable Policy Sale
Not every life insurance transaction qualifies. The sale must involve a transfer to someone with no substantial family, business, or financial relationship with the insured person. Purchases between family members, business partners with existing relationships, or certain qualifying exchanges typically don't count as reportable policy sales.
Step 2: Gather Required Information
You'll need complete identifying information for all parties: the acquirer (you), all payment recipients (seller, brokers, intermediaries who received $600 or more), and the issuer. This includes full legal names, addresses, and taxpayer identification numbers (Social Security Numbers for individuals, Employer Identification Numbers for businesses). You also need the policy number, sale date, and exact payment amounts.
Step 3: Obtain the Blank Forms
Download the official Form 1099-LS from IRS.gov or use compatible tax software. You'll need Copy A (filed with the IRS), Copy B (for the payment recipient), and Copy C (for the issuer). The form is designated as "continuous use," meaning the current version can be used for 2021 and subsequent years until superseded.
Step 4: Complete the Form Accurately
Fill in Box 1 with the amount paid to the payment recipient. This should be the actual payment amount—net proceeds for the seller (gross amount minus selling expenses like broker fees), but the full amount received for brokers and intermediaries. Enter the date of sale in Box 2 using MM/DD/YYYY format. Complete all identifying information fields carefully, as errors here are among the most common filing mistakes.
Step 5: File with the IRS and Furnish Copies
For paper filing, submit Copy A to the IRS along with Form 1096 (Annual Summary and Transmittal) by February 28, 2022. For electronic filing (required if you file 250+ information returns), submit by March 31, 2022, through the IRS FIRE System. Provide Copy C to the insurance issuer by the required deadline (January 18 or earlier). Furnish Copy B to payment recipients by February 15, 2022. You can mail these or provide them electronically if the recipient consents.
Step 6: Keep Records
Retain Copy D for your records for at least four years. This documentation is crucial if the IRS has questions or if you need to file a correction later.
IRS.gov - Instructions for Form 1099-LS
Common Mistakes and How to Avoid Them
Mistake #1: Using the Wrong Form or Outdated Version
Some filers mistakenly use Form 1099-R (which reports retirement distributions) or other 1099 variants. Solution: Always verify you're using the correct Form 1099-LS specifically designated for reportable life insurance sales. While the form is continuous-use, always check IRS.gov for any updates before filing.
Mistake #2: Missing or Incorrect TINs
This is one of the most frequent errors. Filers either omit taxpayer identification numbers entirely or transpose digits. Solution: Use the IRS TIN Matching program (available through IRS e-services) to verify Social Security Numbers and Employer Identification Numbers before filing. Request Form W-9 from all payment recipients well before the filing deadline to allow time for corrections.
Mistake #3: Mismatched Information on Forms 1096 and 1099-LS
When you file paper forms, you must submit Form 1096 as a transmittal. The filer's name, address, and TIN must match exactly on both forms. Solution: Double-check that the information on Form 1096 matches your Forms 1099-LS precisely. Use the same format for addresses and names across all forms.
Mistake #4: Reporting the Wrong Payment Amount
Some filers report the gross sale price to the seller instead of net proceeds (after deducting selling expenses like broker commissions). Others forget to report payments to brokers or intermediaries separately. Solution: For sellers, report their net proceeds (gross amount minus selling expenses). File separate Forms 1099-LS for each payment recipient, including any broker or intermediary who received $600 or more in connection with the sale.
Mistake #5: Missing Critical Deadlines
Different recipients have different deadlines, and many filers miss the early January deadline for issuers. Solution: Create a deadline calendar: January 18 for issuers, February 15 for payment recipients, and February 28/March 31 for the IRS. Build in buffer time to account for postal delays or technical issues with electronic filing.
Mistake #6: Forgetting the Decimal Point in Payment Amounts
Currency amounts must be reported with dollars and cents, including the decimal point. Some filers report "$100000" instead of "$100,000.00." Solution: Always include the decimal point and cents, even if the amount is a whole dollar figure.
Mistake #7: Filing Duplicate Forms
This occurs when multiple acquirers or intermediaries in the same transaction each file separately without coordination. Solution: If multiple parties could be considered acquirers, consider using the unified reporting provisions that allow one party or a third-party contractor to handle all reporting obligations for the transaction.
Mistake #8: Using Non-Scannable or Substitute Forms Incorrectly
The IRS uses optical scanning equipment to process paper forms. Unofficial forms, forms printed on wrong paper, or improperly formatted substitutes cause processing delays. Solution: If filing on paper, order official red-ink forms from the IRS or use a reputable tax software provider that produces IRS-compliant forms. Never photocopy forms for filing with the IRS.
IRS.gov - 2021 General Instructions
What Happens After You File
IRS Processing
After you submit Form 1099-LS, several things occur in sequence:
IRS processing: The IRS receives your form and matches the information against the seller's tax return. They use this data to verify that the seller properly reports any taxable gain from the policy sale. Processing typically takes several weeks for electronic submissions and longer for paper filings.
Insurance Company Reporting
Insurance company reporting: When the issuer receives Copy C from you, they're triggered to file Form 1099-SB (Seller's Investment in Life Insurance Contract) with the IRS and provide a copy to the seller. This companion form reports critical information the seller needs to calculate their tax basis in the policy—essentially, how much they paid in premiums over the years minus any withdrawals. This information is necessary because the seller's taxable gain equals the sale price minus their basis minus any prior taxable distributions.
Seller's Tax Reporting
Seller's tax reporting: The payment recipient (seller) uses the information from your Form 1099-LS and the issuer's Form 1099-SB to report the transaction on their personal tax return. Generally, they'll report a capital gain on Schedule D for the amount exceeding their basis. However, if the policy had "inside buildup" (cash value growth), that portion may be taxed as ordinary income rather than capital gain. The seller should receive both forms well before the April tax filing deadline.
Potential IRS Notices
Potential IRS notices: If there are discrepancies between what you reported and what the payment recipient reports on their tax return—or if they fail to report the transaction at all—the IRS may send notices to you and the recipient requesting clarification. These matching discrepancies can trigger automated letters (CP2100 or CP2100A notices) if taxpayer identification numbers don't match IRS records.
Penalty Assessments
Penalty assessments: If you filed late, filed with incorrect information, or failed to file when required, the IRS will assess penalties. You'll receive a notice (typically a CP215 notice) showing the penalty amount. Penalties are assessed per form, so if you filed multiple late Forms 1099-LS, penalties can accumulate quickly. However, if you have reasonable cause for the failure (such as a natural disaster, serious illness, or unavoidable absence), you can request penalty abatement by writing to the IRS address on the notice explaining your circumstances.
Record Retention
Record retention: Keep all filing records, including copies of forms, transmittals, proof of mailing or electronic submission confirmation, and any correspondence with the IRS for at least four years. The statute of limitations for IRS audits typically runs three years from the filing date, but maintaining records for four years provides additional protection.
IRS.gov - Internal Revenue Manual 20.1.7
FAQs
Q1: What's the difference between Form 1099-LS and Form 1099-SB?
Form 1099-LS is filed by the acquirer (buyer) who purchases the life insurance policy. It reports the sale transaction itself and the amounts paid. Form 1099-SB is filed by the insurance company after they receive notice of the sale. It reports the seller's investment in the contract (their tax basis), which the seller needs to calculate their taxable gain. Think of Form 1099-LS as reporting "what was paid" and Form 1099-SB as reporting "what was originally invested."
Q2: Do I need to file Form 1099-LS for a policy I bought from a family member?
Generally, no. A reportable policy sale only occurs when the acquirer has no substantial family, business, or financial relationship with the insured person. Purchases between family members typically don't qualify as reportable policy sales. However, if you're purchasing through a life settlement company (even if the insured happens to be related to you), different rules may apply. When in doubt, consult a tax professional to evaluate your specific situation.
Q3: What if I can't get a taxpayer identification number from the seller before the deadline?
You should make reasonable efforts to obtain the TIN, including requesting a completed Form W-9. If the seller refuses or fails to provide it, you must still file Form 1099-LS by the deadline, but you'll need to initiate backup withholding at 24% on the payment. Report the payment amount and indicate that you've withheld and remitted backup withholding taxes. You may need to file the form showing the seller's name and address even without a complete TIN, though this will likely trigger penalties unless you can demonstrate reasonable cause.
Q4: Can I file one Form 1099-LS if I made multiple purchases during the year?
No. You must file a separate Form 1099-LS for each reportable policy sale transaction. Each policy sale is considered a distinct event requiring its own information return. However, if you acquired multiple interests in the same policy in a single transaction from different sellers, you would file separate Forms 1099-LS for each seller.
Q5: What happens if I realize I made a mistake after filing?
File a corrected Form 1099-LS as soon as you discover the error. Check the "CORRECTED" box at the top of the form, fill in the correct information, and submit it to the IRS. Also provide corrected copies to all recipients (payment recipients and the issuer). The sooner you file the correction, the better—early corrections may reduce or eliminate penalties. If the error involves the payment amount or TIN, correcting it promptly helps the recipient file their tax return accurately.
Q6: Are life insurance death benefits reported on Form 1099-LS?
No. Form 1099-LS reports the sale or transfer of a policy while the insured is still alive. When the insured later dies and benefits are paid, the payer reports those death benefits on Form 1099-R (with specific codes indicating they're death benefits from a policy that was previously sold). The Form 1099-R includes information about how much of the death benefit may be taxable based on the policy's history.
Q7: Do the same reporting requirements apply if I'm an insurance company that bought back a policy from a policyholder?
It depends on the relationship. If you're the original issuing insurance company buying back your own policy (essentially a surrender), this typically isn't a reportable policy sale because you're not an "acquirer" in the sense meant by the law—you're just canceling the policy. However, if you're a different insurance company purchasing someone else's policy, and you have no substantial relationship with the insured, you may need to file Form 1099-LS. The regulations provide specific guidance on these scenarios, and the issuer's obligations differ based on whether they're acquiring the policy or simply administering it.
Additional Resources
Form 1099-LS and Instructions (IRS.gov)
2021 General Instructions for Certain Information Returns (IRS.gov)
IRS Final Regulations on Life Insurance Transactions (IRS.gov)
This summary provides general information for educational purposes based on IRS guidance for the 2021 tax year. For specific situations or tax advice, consult a qualified tax professional.
