IRS Form 1099-SB, titled “Seller’s Investment in Life Insurance Contract,” is a tax form used to report the sale, transfer, or assignment of a life insurance policy. It’s issued by the original insurance company to provide the new policyholder with important tax information about the policy’s cost basis, which will be relevant if the policy is eventually surrendered or paid out.
Why IRS Form 1099-SB Matters
- Provides Cost Basis Information:
The primary purpose of Form 1099-SB is to disclose the cost basis of the policy being transferred. The cost basis is the total of all premiums paid by the original policyholder, which will determine the taxable portion if the new owner eventually receives a payout. Without this form, the new owner would not know the exact amount of the original investment, making it difficult to calculate gains or losses for tax purposes. - Essential for Tax Calculation:
When a policyholder assigns or sells a life insurance policy (often in a life settlement transaction), the new owner needs to know how much was previously paid into the policy. This is because the taxable gain on any future payout will be based on the difference between the payout and the policy’s cost basis. - Ensures IRS Compliance:
The IRS uses this form to monitor life insurance policy transfers, which are taxable under specific circumstances. Since the transfer of life insurance policies can lead to taxable income when proceeds exceed the original investment, Form 1099-SB helps the IRS verify that future income related to the policy is accurately reported.
Example of Why It Matters
If Alice sells her life insurance policy to a third-party company, Life Settlements Corp., her insurance company will issue Form 1099-SB, showing that Alice had paid $50,000 in premiums (her cost basis). When Life Settlements Corp. later collects the policy’s death benefit of $100,000, they can determine their taxable gain by subtracting Alice’s original cost basis of $50,000 from the $100,000 payout, resulting in a $50,000 gain, which they will need to report as taxable income.
