Form 1099-LS: Reportable Life Insurance Sale – Your Complete Guide for 2024
What Form 1099-LS Is For
Form 1099-LS, officially titled "Reportable Life Insurance Sale," is an IRS information return that documents when someone sells or transfers a life insurance policy to another party. Think of it as a receipt that tells the IRS a transaction occurred—but receiving one doesn't automatically mean you owe taxes.
The buyer (called the "acquirer" in IRS terminology) must file this form whenever they purchase a life insurance policy from someone who doesn't have a substantial family, business, or financial relationship with the person insured under that policy. This type of transaction is called a "reportable policy sale." IRS.gov
Common Scenarios That Trigger Form 1099-LS
- Life settlements: Selling your policy to a life settlement company for immediate cash
- Viatical settlements: Selling your policy due to terminal illness to receive funds while still alive
- Business policy transfers: Transferring a key person or corporate-owned life insurance policy to a business partner or third party
The form serves two purposes: it notifies the IRS that a potentially taxable transaction occurred, and it provides you (the seller) with documentation you'll need to determine if you owe any taxes on the sale.
When You’d Use Form 1099-LS (Late/Amended)
Under normal circumstances, you won't file Form 1099-LS yourself—the buyer files it and sends you a copy. However, there are situations where corrections or late filings become necessary.
Standard Deadline (Buyer/Acquirer)
If you're the buyer (acquirer): You must file Form 1099-LS with the IRS and furnish copies to both the seller and the insurance company by January 31 following the year of the sale. For sales occurring in 2024, the deadline is January 31, 2025. IRS.gov
Corrected Returns
If a reportable policy sale is rescinded (canceled), or if errors are discovered on an already-filed form, a corrected Form 1099-LS must be filed within 15 calendar days of discovering the error or receiving notice of the rescission. This tight deadline emphasizes the importance of accuracy when initially filing. IRS.gov
Late Filing Penalties (2024)
- $60 per form if filed within 30 days of the deadline
- $120 per form if filed 31 days to August 1 after the deadline
- $310 per form if filed after August 1 or not filed at all
- Maximum penalties can reach $232,500 per year for larger businesses
E-Filing Requirements (2024)
Starting in 2024, anyone filing 10 or more information returns (including Form 1099-LS) must file electronically. This threshold was reduced from the previous 250-return requirement. IRS.gov
Key Rules for 2024
Understanding the key rules helps both buyers and sellers navigate their obligations correctly.
Who Must File
The acquirer (buyer) must file if they purchase any interest in a life insurance contract where they have no substantial family, business, or financial relationship with the insured person. Exceptions exist for certain foreign persons, section 1035 exchanges, and situations where unified reporting provisions apply. IRS.gov
What Information Is Required
Form 1099-LS must include:
- The payment recipient's (seller's) name, address, and taxpayer identification number (TIN)
- The acquirer's (buyer's) contact information
- The issuer's (insurance company's) name
- The policy number
- Box 1: Amount paid to the payment recipient
- Box 2: Date of sale
Payment Recipients
A "payment recipient" isn't just the original policyholder. It includes anyone who receives payment from the sale, such as brokers or intermediaries who retain part of the proceeds. However, someone other than the seller only qualifies as a payment recipient if they received $600 or more from the transaction. IRS.gov
Statement Furnishing Requirements
The acquirer must provide copies to:
- The seller (Copy B) by January 31
- The insurance company issuer (Copy C) by January 31—but only if the recipient is the seller and the acquisition was direct
TIN Truncation
For privacy protection, filers may truncate (partially mask) the recipient's Social Security number or taxpayer ID on Copy B (the copy sent to the seller), but not on forms filed with the IRS. IRS.gov
Step-by-Step (High Level)
For Buyers (Acquirers)
Step 1: Identify reportable transactions
Determine if your purchase qualifies as a reportable policy sale (generally, you're buying from someone with no substantial relationship to the insured).
Step 2: Gather information
Collect all necessary details—seller's TIN, policy number, insurance company information, sale amount, and sale date.
Step 3: Complete the form
Fill out Form 1099-LS with all required information. Online fillable versions are available at IRS.gov/Form1099LS.
Step 4: File with the IRS
Submit Form 1099-LS to the IRS by January 31. If filing 10 or more information returns, you must e-file.
Step 5: Furnish copies
Send Copy B to the seller and Copy C to the insurance company by January 31.
Step 6: Maintain records
Keep Copy A and all supporting documentation for at least three years.
For Sellers (Payment Recipients)
Step 1: Receive the form
You should receive Copy B from the buyer by mid-February.
Step 2: Verify accuracy
Check all information—amounts, dates, and identification numbers—for accuracy.
Step 3: Receive Form 1099-SB
You'll also likely receive Form 1099-SB from the insurance company, showing your cost basis in the policy.
Step 4: Calculate tax implications
Use both forms to determine if you have taxable income, ordinary income, capital gains, or a capital loss.
Step 5: Report on your tax return
Include any taxable amounts on your Form 1040 (Schedule D for capital gains or the "Other Income" section for ordinary income).
Step 6: File by Tax Day
Report the transaction when filing your annual tax return, typically by April 15.
Common Mistakes and How to Avoid Them
Mistake #1: Incorrect or missing TINs
Solution: Always verify Social Security numbers or EINs before filing. Incorrect TINs can trigger backup withholding requirements and penalties. Use IRS TIN Matching services if available.
Mistake #2: Failing to file because the relationship seems "substantial"
Solution: When in doubt, file. The definition of "substantial family, business, or financial relationship" is nuanced. If you're unsure whether your relationship with the insured qualifies for an exception, consult the regulations or file to be safe.
Mistake #3: Not reporting intermediary payments
Solution: Remember that brokers and other intermediaries who receive $600 or more are payment recipients requiring their own Form 1099-LS. Don't assume only the original seller needs reporting.
Mistake #4: Missing the issuer copy requirement
Solution: If the payment recipient is the seller and you directly acquired the policy, you must send Copy C to the insurance company. Ensure you're sending it to the correct administrative office that processes ownership transfers.
Mistake #5: Reporting the wrong amount in Box 1
Solution: Box 1 should show the total amount paid to that specific payment recipient, not the total purchase price if multiple parties received payments. Issue separate forms for each recipient.
Mistake #6: Ignoring rescissions
Solution: If a sale falls through or is canceled, you have only 15 days to file corrected forms. Set up systems to track potential rescissions and act quickly.
Mistake #7: Assuming sellers don't need to report
Solution: Sellers must report proceeds on their tax returns even if they received Form 1099-LS. The form is informational—your tax obligation depends on comparing the sale price to your basis, which Form 1099-SB helps establish.
What Happens After You File
For Buyers
Once you've filed Form 1099-LS with the IRS and furnished copies to recipients, your primary obligation is complete. However:
- Keep all records for at least three years in case of IRS inquiries
- Be prepared to file corrections if the sale is rescinded or errors are discovered
- Monitor for any IRS notices requesting clarification or additional information
For Sellers
The real work begins after you receive Form 1099-LS:
- Tax determination: You'll receive both Form 1099-LS (from the buyer) and Form 1099-SB (from the insurance company). Together, these help you calculate whether you owe taxes. The IRS provides a helpful online calculator to determine taxability.
- Four possible tax scenarios:
- No tax owed: If you sold the policy for less than your total basis (premiums paid), no tax is due
- Ordinary income: Gains up to the policy's cash surrender value are taxed as ordinary income
- Capital gains: Amounts exceeding the cash surrender value are taxed as capital gains (long-term if you held the policy more than one year)
- Capital loss: If you sold for less than your basis, you have a deductible capital loss
- IRS matching: The IRS receives copies of all Forms 1099-LS and will match them against individual tax returns. Failing to report a transaction shown on Form 1099-LS may trigger an automated notice or audit.
- State tax implications: Some states have different rules for taxing life insurance policy sales. Check your state's requirements separately.
FAQs
Q1: Does receiving Form 1099-LS mean I definitely owe taxes?
No. Form 1099-LS is an information return that reports a transaction occurred, but whether you owe taxes depends on whether you had a gain. If the amount you received doesn't exceed your basis (what you paid in premiums over the years), you won't owe taxes on the sale.
Q2: What's the difference between Form 1099-LS and Form 1099-SB?
Form 1099-LS comes from the buyer and shows the amount they paid you. Form 1099-SB comes from the insurance company and shows your investment (basis) in the policy. You need both to calculate your actual taxable gain or loss. The buyer reports the transaction; the insurer reports your cost basis.
Q3: I'm the seller—do I need to file Form 1099-LS?
No. As the seller, you receive the form but don't file it. The buyer (acquirer) is responsible for filing with the IRS. Your responsibility is to report any taxable proceeds on your personal income tax return. IRS.gov
Q4: What if the amounts on my Form 1099-LS are incorrect?
Contact the acquirer (buyer) immediately to request a corrected form. The acquirer has 15 days to file corrections with the IRS and furnish you with a corrected copy. Don't file your tax return with incorrect information—wait for the corrected form. IRS.gov
Q5: Can I avoid reporting if the sale was for less than $600?
Buyers don't need to report payment recipients (other than the seller) who received less than $600. However, the seller must still be reported regardless of amount. As a seller, you must report proceeds on your tax return even if they're under $600, assuming you have a taxable gain.
Q6: Where do I report Form 1099-LS proceeds on my tax return?
It depends on the type of income:
- Ordinary income: Report on Schedule 1 (Form 1040), line 8z ("Other income")
- Capital gains: Report on Schedule D (Form 1040) and Form 8949
The portion that's ordinary income vs. capital gains depends on your basis and the policy's cash surrender value. Tax preparation software or a tax professional can help make this determination.
Q7: Are viatical settlements (selling due to terminal illness) taxed differently?
Viatical settlements may receive more favorable tax treatment under Section 101(g) of the Internal Revenue Code if the insured is terminally or chronically ill. Proceeds may be partially or fully excludable from income. However, you'll still receive Form 1099-LS documenting the transaction. Consult a tax professional for guidance on these specialized situations.
Additional Resources
- IRS Form 1099-LS Information
- Instructions for Form 1099-LS
- General Instructions for Certain Information Returns
- IRS Life Insurance Proceeds Calculator
This guide is for informational purposes only and does not constitute tax or legal advice. Consult a qualified tax professional for guidance specific to your situation.
