Form 1099-LS: Reportable Life Insurance Sale (2020)
When someone sells their life insurance policy to an investor or settlement company, the IRS wants to know about it. That's where Form 1099-LS comes in. This relatively new tax form—first used for transactions beginning in 2018—ensures that sales of life insurance policies are properly reported to the government. If you're involved in selling or buying a life insurance policy, this guide will walk you through everything you need to know about Form 1099-LS for the 2020 tax year.
What Form 1099-LS Is For
Form 1099-LS, "Reportable Life Insurance Sale," tracks the sale or transfer of life insurance policies when the buyer has no substantial family, business, or financial relationship with the insured person. This typically covers "life settlements" or "viatical settlements"—transactions where policyholders sell their policies to third-party investors for cash.
The form serves several purposes. First, it alerts the IRS that a reportable policy sale has occurred. Second, it documents how much money the seller received. Third, it notifies the insurance company (the issuer) that ownership has changed hands, which triggers additional reporting requirements on their end through Form 1099-SB.
Who gets reported? The acquirer (buyer) must file Form 1099-LS for each payment recipient—anyone who receives money in the transaction. This includes the policy seller, but also brokers, agents, or intermediaries who retained at least $600 from the sale proceeds. According to IRS regulations section 1.6050Y-2, the acquirer must provide copies to both the payment recipient and the insurance company issuer.
Think of it this way: if you own a $500,000 life insurance policy but need cash now and sell it to an investment company for $100,000, that investor becomes the "acquirer" and must file Form 1099-LS showing they paid you $100,000. The insurance company also receives a copy so they know you're no longer the owner.
When You’d Use Form 1099-LS (Including Late and Amended Filings)
For 2020 transactions, the standard filing deadline with the IRS was March 1, 2021 for paper filers or March 31, 2021 for electronic filers. However, Form 1099-LS has unique recipient deadlines that differ from most other 1099 forms.
Recipient and Issuer Deadlines
Payment recipients must receive their copy by February 15, 2021. But here's where it gets interesting: the insurance company issuer has an earlier deadline. According to the 2020 General Instructions for Certain Information Returns, issuers must receive Form 1099-LS by January 15, 2021 at the latest. However, if the sale happened late in the year, the deadline is the later of: (1) 20 calendar days after the sale, or (2) 5 calendar days after any state-mandated rescission period ends—provided this occurs before January 15.
Late Filings
Late filings: If you miss the deadline, you can still file, but penalties may apply. The IRS charges tiered penalties: $50 per form if you correct within 30 days, $110 per form if corrected by August 1, or $280 per form (up to $1,130,500 annually) for later filings or intentional disregard.
Amended/Corrected Returns
Amended/corrected returns: Mistakes happen. If you filed incorrect information—wrong dollar amount, misspelled name, incorrect taxpayer identification number (TIN)—you must file a corrected Form 1099-LS. Mark the "CORRECTED" box at the top of the form and resubmit with accurate information. The IRS recommends filing corrections as soon as you discover errors.
Special Rescission Rule
Special rescission rule: Life insurance sales often include rescission periods—time frames where either party can cancel the transaction. If a reportable policy sale is rescinded after you've filed Form 1099-LS, you must file a corrected form within 15 calendar days of receiving notice of the rescission. You must also send corrected statements to recipients and the issuer within the same 15-day window, as outlined in IRS regulations section 1.6050Y-2(e).
Key Rules or Details for 2020
Several important rules governed Form 1099-LS for 2020:
Who Must File
Who must file: Any "acquirer" in a reportable policy sale must file. An acquirer is anyone who buys an interest in a life insurance policy—whether directly or indirectly through a partnership, trust, or other entity. Life settlement companies, viatical settlement providers, and even individual investors fall into this category.
Exceptions
Exceptions exist: You don't file Form 1099-LS if you received the policy as a gift, if you qualify for specific regulatory exceptions (such as being a foreign person under certain circumstances), or if another acquirer reports on your behalf under "unified reporting" provisions. Section 1035 exchanges (tax-free policy exchanges) also typically don't require Form 1099-LS filing.
Electronic Filing Threshold
Electronic filing threshold: For 2020, if you filed 250 or more information returns of any type during the year, you were required to file electronically. Smaller filers could choose paper or electronic filing.
Form and Paper Requirements
Form requirements: Paper filers must use official IRS forms—red scannable versions printed by the IRS or approved vendors. Photocopies aren't acceptable. You must also submit Form 1096 (Annual Summary and Transmittal) with paper returns. All paper forms for 2020 went to one of three IRS Service Centers in Austin, Kansas City, or Ogden, depending on your location.
TIN Matching
TIN matching: The filer's name and taxpayer identification number must match IRS records exactly. Mismatches can trigger penalties and backup withholding notices. The IRS offers a TIN Matching service through their e-services portal to verify information before filing.
Multiple Recipients
Multiple recipients: If multiple people received payments from one policy sale—say, two co-owners and a broker—the acquirer files separate Form 1099-LS for each recipient who received reportable amounts.
Step-by-Step (High Level)
Here's how filing Form 1099-LS works from start to finish:
Step 1: Determine if you're the acquirer.
If you purchased a life insurance policy or interest in one, and you don't have a substantial family, business, or financial relationship with the insured person (other than owning the policy), you're likely the acquirer with filing responsibilities.
Step 2: Gather required information.
You'll need: (1) your name, address, phone number, and TIN as the acquirer; (2) the payment recipient's name, address, and TIN; (3) the issuer's name; (4) the policy number; (5) the total amount paid to the recipient; and (6) the date of sale.
Step 3: Complete the form.
Form 1099-LS has two main boxes. Box 1 shows the amount paid to the payment recipient. Box 2 shows the date of sale. Fill in all identifying information in the designated areas. Note that reporting the payment amount to the issuer is optional on Copy C (the issuer's copy).
Step 4: Distribute copies.
The form comes in multiple copies with specific purposes: Copy A goes to the IRS, Copy B goes to the payment recipient, Copy C goes to the issuer (insurance company), Copy 1 goes to your state tax department if required, and Copy 2 is for your records.
Step 5: File with the IRS.
For paper filing, mail Copy A along with Form 1096 to the appropriate IRS Service Center by March 1. For electronic filing through the IRS FIRE System, submit by March 31. Many filers use software or services for electronic submission.
Step 6: Meet recipient deadlines.
Furnish Copy B to payment recipients by February 15, 2021. Furnish Copy C to the issuer by January 15, 2021 (or the later date if the special late-year sale rules apply). You can provide these electronically if the recipient consents.
Step 7: Keep records.
Maintain copies of all filed forms and supporting documentation for at least three years. The IRS may request proof of filing during audits or inquiries.
Common Mistakes and How to Avoid Them
Form 1099-LS is complex, and filers frequently make these errors:
Mistake #1: Missing the issuer deadline.
Many filers remember the February 15 recipient deadline but forget the earlier January 15 issuer deadline. Solution: Mark both dates on your calendar immediately after the sale. Process the issuer's copy first to ensure compliance.
Mistake #2: Incorrect or missing TINs.
Wrong Social Security Numbers or Employer Identification Numbers cause processing delays and penalties. Solution: Request Form W-9 from all payment recipients before or at the time of sale. Verify TINs using the IRS TIN Matching service before filing.
Mistake #3: Using the wrong form year.
Always use forms dated for the tax year you're reporting. You cannot use a 2019 form to report 2020 transactions. Solution: Download current forms directly from IRS.gov or order official versions.
Mistake #4: Not recognizing multiple payment recipients.
Acquirers sometimes overlook brokers or intermediaries who retained fees from the sale proceeds. Solution: Carefully review the transaction to identify everyone who received $600 or more. File a separate 1099-LS for each.
Mistake #5: Forgetting Form 1096.
Paper filers must include a Form 1096 transmittal summary. Without it, the IRS may reject your entire submission. Solution: Complete Form 1096 showing totals for all Forms 1099-LS you're submitting, and mail them together.
Mistake #6: Poor form quality.
Photocopied forms, incorrect paper stock, or non-scannable printing causes processing problems. Solution: Use official IRS forms printed in red ink or file electronically. Never photocopy the official red forms.
Mistake #7: Neglecting state filing.
Some states require copies of federal information returns. Solution: Check your state's tax authority website to determine if you need to file state copies and what the deadlines are.
What Happens After You File
Once you file Form 1099-LS, several things occur in sequence:
IRS Processing
IRS processing: The IRS scans and processes the forms, matching the information to taxpayers' accounts. This typically takes several months. The data becomes part of the taxpayer's record and helps the IRS verify income reported on tax returns.
Insurance Company Reporting
Insurance company reporting: When the issuer receives Copy C of Form 1099-LS, they become responsible for filing Form 1099-SB, "Seller's Investment in Life Insurance Contract." This form reports the seller's "basis"—the total premiums paid, cost of insurance charges, and other amounts that reduce taxable gain. The issuer must furnish Form 1099-SB to the seller by February 15 of the year following the sale.
Taxpayer Reporting
Taxpayer reporting: The seller uses information from both Form 1099-LS and Form 1099-SB to calculate their taxable gain or loss on their tax return. The difference between the amount received (from 1099-LS) and the basis (from 1099-SB) determines the taxable income. This typically gets reported on Form 8949 and Schedule D.
Potential IRS Matching Notices
Potential IRS matching notices: The IRS computer systems match 1099 forms against tax returns. If a taxpayer receives a Form 1099-LS but doesn't report the transaction, they may receive a CP2000 notice proposing additional tax, penalties, and interest.
Backup Withholding Consequences
Backup withholding consequences: If you filed Form 1099-LS showing payments to someone but didn't have their correct TIN, you should have withheld 24% backup withholding. If you didn't, you may receive IRS notices requesting the withheld amounts or explanations.
Amendment Opportunities
Amendment opportunities: If you discover errors after filing, you can still file corrected forms. Act quickly—the sooner you correct mistakes, the lower the potential penalties.
FAQs
Q1: What exactly is a "reportable policy sale"?
A reportable policy sale is any direct or indirect acquisition of an interest in a life insurance contract where the acquirer has no substantial family, business, or financial relationship with the insured person apart from the policy interest. This typically includes life settlements (policies sold by healthy individuals) and viatical settlements (policies sold by terminally or chronically ill individuals). However, sales to family members, business partners with insurable interest, or certain qualifying organizations may not be reportable.
Q2: Do I need to file Form 1099-LS if I sold my policy to a family member?
Usually no. If the buyer has a substantial family relationship with the insured person, it's generally not a reportable policy sale. For example, if a parent sells their policy to their child, or a spouse acquires their deceased spouse's policy, these typically aren't reportable. However, the "substantial relationship" requirement is fact-specific, so consult IRS regulations section 1.101-1 or a tax professional if uncertain.
Q3: What's the difference between Form 1099-LS and Form 1099-SB?
Form 1099-LS is filed by the acquirer (buyer) and shows how much the seller received. Form 1099-SB is filed by the insurance company issuer and shows the seller's investment in the contract (basis). Both forms are necessary for the seller to properly calculate taxable income. Think of 1099-LS as the "sales price" form and 1099-SB as the "cost basis" form.
Q4: I'm an individual who bought someone's life insurance policy as an investment. Do I really have to file these forms?
Yes, if it's a reportable policy sale. The filing obligation falls on the acquirer regardless of whether you're a large company or an individual. If you're uncomfortable with the compliance requirements, consider using a qualified intermediary or settlement company that can handle reporting obligations. You can also authorize a contractor to file on your behalf under the unified reporting provisions.
Q5: What if I'm a broker who facilitated the sale but didn't actually purchase the policy?
If you received $600 or more in fees or commissions from the transaction, you should be listed as a payment recipient on Form 1099-LS filed by the actual acquirer. However, if you temporarily held funds or acted as an intermediary, you might have filing obligations yourself. This gets complicated quickly—review regulations section 1.6050Y-1(a)(16) carefully or consult a tax professional who specializes in life settlements.
Q6: Can I file Form 1099-LS electronically, and is it required?
For 2020, electronic filing was required if you filed 250 or more information returns of any type. Below that threshold, electronic filing was voluntary but encouraged. The IRS accepts electronic submissions through the FIRE (Filing Information Returns Electronically) system. Electronic filing offers faster processing, immediate acknowledgment of receipt, and reduced error rates.
Q7: What penalties apply if I file late or incorrectly?
The IRS imposes graduated penalties: $50 per return if you correct within 30 days of the due date (annual maximum $565,500); $110 per return if you correct by August 1 (annual maximum $1,696,500); $280 per return for later corrections (annual maximum $3,392,000); and $580 per return for intentional disregard (no annual maximum). Penalties also apply for failure to furnish correct statements to recipients. Small businesses with average annual gross receipts of $5 million or less face reduced maximum penalties.
Additional Resources
For authoritative guidance on Form 1099-LS, consult these official IRS resources available at IRS.gov:
- About Form 1099-LS
- Instructions for Form 1099-LS
- 2020 General Instructions for Certain Information Returns
- Regulations sections 1.6050Y-1 and 1.6050Y-2
Form 1099-LS represents an important compliance requirement for the growing life settlement industry. While the form itself is relatively simple, the underlying rules about who must file, when to file, and what constitutes a reportable transaction can be complex. When in doubt, consult a qualified tax professional who understands life insurance taxation and information reporting requirements. Proper compliance protects you from penalties and ensures all parties to the transaction have the information needed for accurate tax reporting.
