How do I file the sale of a life insurance policy. I received a 1099 misc.

[srhipps]

Since the total amount paid in premiums was higher than the sale price I figure there no tax owed.

[ScruffyCurmudgeon]

a reportable capital loss then - as opposed to taxable ordinary income on the 1099-misc

[srhipps]

The buyer of the policy only reported what they paid to my wife on the 1099 misc.

[ScruffyCurmudgeon]

improperly

[Jenn79nic]

I have a question about this. What if the person selling their policy is terminally ill with life expectancy of 24 months or less? I was told if you do a life settlement or sometimes called a viatical settlement then the amount the policy sells for is NOT taxable. 

[VictoriaD75]

It is possible that the viatical settlement is not taxable if you qualify. Per the IRS:

Accelerated Death Benefits

Certain amounts paid as accelerated death benefits under a life insurance contract or viatical settlement before the insured's death are excluded from income if the insured is terminally or chronically ill.

Viatical settlement.

This is the sale or assignment of any part of the death benefit under a life insurance contract to a viatical settlement provider. A viatical settlement provider is a person who regularly engages in the business of buying or taking assignment of life insurance contracts on the lives of insured individuals who are terminally or chronically ill and who meets the requirements of section 101(g)(2)(B) of the Internal Revenue Code.

Exclusion for terminal illness.

Accelerated death benefits are fully excludable if the insured is a terminally ill individual. This is a person who has been certified by a physician as having an illness or physical condition that can reasonably be expected to result in death within 24 months from the date of the certification.

Exclusion for chronic illness.

If the insured is a chronically ill individual who isn't terminally ill, accelerated death benefits paid on the basis of costs incurred for qualified long-term care services are fully excludable. Accelerated death benefits paid on a per diem or other periodic basis are excludable up to a limit. For 2019, this limit is $370. It applies to the total of the accelerated death benefits and any periodic payments received from long-term care insurance contracts. For information on the limit and the definitions of chronically ill individual, qualified long-term care services, and long-term care insurance contracts, see Long-Term Care Insurance Contracts under Sickness and Injury Benefits, earlier.

Exception.

The exclusion doesn't apply to any amount paid to a person (other than the insured) who has an insurable interest in the life of the insured because the insured:

• Is a director, officer, or employee of the person; or

• Has a financial interest in the person's business.

Form 8853.

To claim an exclusion for accelerated death benefits made on a per diem or other periodic basis, you must file Form 8853 with your return. You don't have to file Form 8853 to exclude accelerated death benefits paid on the basis of actual expenses incurred.

IRS Publication 525

Viatical Settlement Taxation

[darrellfung]

Hello:

I sold a policy last year for $100,000.   I held it over 10 years.  The total premiums I paid were $137,000.

I received a 1099 LS for $100,000.  But the Life Insurance Company will not send a 1099 with the premiums paid.

I think I can still put it on Form 8949 and have a $37,000 capital loss carryover?

[ErnieS0]

No. A personal life insurance policy is personal property and a loss on the sale of personal property is not deductible. 

[darrellfung]

Hello Scruffy:

If you have a loss from the sale of Life Insurance, can you take a capital loss?

Sold LI Policy.   Received 1099 for sale price.  $80,000

Premiums paid over 14 years:  $106,000

Capital loss $26,000?

[ThomasM125]

No, the loss is not deductible. A life insurance policy is considered a personal asset and as such the loss on sale of it is not deductible. It's not an investment since you use it for personal purposes, in that it provides insurance coverage while you own it. 

[ScruffyCurmudgeon]

In reference to the answer that was posted by @VictoriaD75 
Capital gains, if recognized on the sale of a life insurance policy, are fully taxable (rare exception for situations arising from demutualization) -but the Internal Revenue Code, and the Tax Court, do not view a life insurance policy to be an investment product and therefore a loss on the sale (you paid in more on net premium than you received on the sale) is NOT deductible as a capital loss.

[Mike9241]

did you know that the premiums you pay may not be your tax basis?  most policies have a term rider and part of each payment goes towards paying for that term insurance. these amounts are not part of your basis.  so you may not have a loss.  only the insurance company can tell you what your tax basis is. .

[ScruffyCurmudgeon]

Perhaps you failed to notice what was written:  "net premium "