The Tax Cuts and Jobs Act of 2017 made two changes that still shape every life settlement in 2026: it stopped requiring sellers to reduce their tax basis by the cost of insurance, which lowered taxes for many sellers, and it created new information-reporting forms so that policy sales are reported to the IRS by both the buyer and the insurance carrier. One change helps you. The other simply means the transaction is visible.
Before the law, IRS guidance in Revenue Ruling 2009-13 told sellers to subtract cumulative cost-of-insurance charges from basis. On a policy held for twenty-five years, that could shrink basis substantially and inflate the taxable gain. The 2017 law removed that step for settlements, aligning the treatment of selling a policy with the treatment of surrendering one.
This page explains both changes in plain terms, describes the reporting forms and who files them, and tells you what to verify for 2026 before relying on any of it. Nothing here is tax advice — take your numbers to a CPA. Pine Lake Life Solutions works with policies of $100,000 or more in death benefit and typically pays more than cash surrender value. This page is educational only and is not an offer to purchase any policy.
In This Article
- Change One: Basis No Longer Reduced by Cost of Insurance
- The Retroactive Effective Date
- Change Two: Reportable Policy Sale Reporting
- What the Forms Mean for You Practically
- What Did Not Change
- 2026 Status and What to Verify
- When Tax Advantages Do Not Justify Selling
- Practical Next Steps
- Frequently Asked Questions
Change One: Basis No Longer Reduced by Cost of Insurance
Every life insurance policy has an internal charge for the pure insurance protection — the cost of insurance. Under Revenue Ruling 2009-13, a seller in a life settlement had to reduce basis by the cumulative amount of those charges, on the theory that the protection had been consumed rather than invested.
The practical effect was a smaller basis and a bigger taxable gain, and it also created an odd asymmetry: someone who surrendered a policy got a larger basis than someone who sold the same policy. The 2017 law removed the reduction for settlement purposes, so basis is generally total premiums paid, adjusted for distributions received, without subtracting cost of insurance.
How much difference does that make? Consider a hypothetical policy with $90,000 of cumulative premiums and $35,000 of cumulative cost-of-insurance charges. Under the old rule basis would be about $55,000; under the current rule it is about $90,000. On a $130,000 sale, that is roughly $35,000 less income to report. Figures are illustrative; verify with a CPA.
The Retroactive Effective Date
The basis change was written to apply to transactions occurring after a date in 2009 — commonly cited as August 25, 2009, the date of the earlier revenue ruling. That retroactivity was deliberate, intended to unwind the effect of the ruling rather than only change things going forward.
Verify this date and its current application for 2026 with a tax professional before acting on it. If you sold a policy between 2009 and 2017 and computed tax under the older, less favorable rule, it is worth asking a CPA whether anything can still be done, though statute-of-limitations rules on amended returns generally limit how far back you can go.
For a sale you are contemplating today, the practical takeaway is simpler: use total premiums paid as your starting point for basis, gather the carrier records that prove it, and let a CPA finalize the number.
Change Two: Reportable Policy Sale Reporting
The second change created a defined category called a reportable policy sale and attached information-reporting duties to it. The goal was transparency: the IRS wanted the transaction reported by the parties who know about it rather than relying on sellers to self-report accurately.
Two forms are central. Form 1099-LS is generally filed by the buyer, or acquirer, to report payments made in a reportable policy sale, with copies to the seller and to the insurance carrier. Form 1099-SB is generally filed by the insurance carrier to report the seller’s investment in the contract — essentially the carrier’s view of your basis — and the policy’s surrender amount.
The sequence matters. The buyer’s filing notifies the carrier that a sale occurred; the carrier then reports the basis information. Verify the current 2026 forms, thresholds, and filing deadlines, since reporting requirements have been revised since the original rules were issued.
What the Forms Mean for You Practically
You should expect to receive copies. When they arrive, do one thing before filing: compare the investment-in-the-contract figure on the carrier’s form to your own premium history. Carriers compute that number from their own records, and records can be incomplete after decades, after a policy changed administrators through an acquisition, or where dividends and withdrawals were handled inconsistently.
If the numbers differ, that is not a crisis, but it is a conversation for your CPA before the return goes out. You are entitled to report the correct basis; you simply need documentation to support it. Keep the premium history, the dividend history, the settlement agreement, the closing statement, and both forms in one file.
Also assume the transaction is fully visible to the IRS. Any advisor who suggests structuring a sale so it does not get reported is describing something you should walk away from.
| Topic | Before the 2017 law | After, as generally applied in 2026 |
|---|---|---|
| Basis in a settlement | Reduced by cumulative cost of insurance | Generally total premiums paid, no cost-of-insurance reduction |
| Basis on surrender | Not reduced by cost of insurance | Unchanged |
| Typical result for sellers | Higher taxable gain | Lower taxable gain |
| Buyer reporting | Limited | Form 1099-LS generally filed by the acquirer; verify for 2026 |
| Carrier reporting | Limited | Form 1099-SB generally reports investment in the contract; verify for 2026 |
| Three-layer taxation | Basis, ordinary income, capital gain | Unchanged |
| Viatical exclusion | Available under IRC Section 101(g) | Unchanged; conditions apply |
What Did Not Change
The three-layer structure of taxation stayed intact. Proceeds up to basis are generally tax-free. Proceeds between basis and cash surrender value are generally ordinary income. Proceeds above cash surrender value are generally long-term capital gain. The 2017 law changed how basis is measured, not how the layers work.
The viatical exclusion under IRC Section 101(g) also remained. A terminally ill insured, generally certified by a physician, may exclude proceeds from income entirely, and a chronically ill insured may qualify subject to per-diem limits — typically where the buyer meets licensing requirements. That exclusion sits outside the ordinary settlement framework and should be checked first by anyone facing a terminal diagnosis.
Transfer-for-value rules also remained relevant, with the reportable policy sale definition interacting with them. That is technical territory; a CPA should handle it.
2026 Status and What to Verify
Verify four things before relying on this page. First, that the basis provision remains in force for 2026 and whether any sunset applies — several individual provisions of the 2017 law were written with expiration dates, and tax law has continued to change since. Second, the current form numbers, filing thresholds, and deadlines for reportable policy sale reporting. Third, any updated IRS guidance or regulations interpreting the reportable policy sale definition. Fourth, your own state’s treatment, which does not automatically follow federal rules.
The safest posture is to treat this page as a map of the terrain and a CPA as the person who reads the current road signs. Tax rules that were stable for years can change in a single act of Congress, and a page published in 2026 cannot promise otherwise.
When Tax Advantages Do Not Justify Selling
A more favorable basis rule makes selling more attractive at the margin. It does not make selling right.
A death benefit paid to a beneficiary is generally income-tax-free, which beats any settlement outcome on a purely tax basis. If a surviving spouse, a disabled adult child, or a business obligation still depends on that coverage, keep the policy. If the insured is terminally ill, the viatical exclusion or an accelerated death benefit rider already in the contract may deliver money faster and tax-free, without a months-long sale. If cash surrender value is under roughly $15,000 and you are working against a Medicaid application deadline, surrendering usually wins on speed — a settlement takes 60 to 120 days. And for a short-term cash need, a policy loan is generally not a taxable event while the policy stays in force, though it reduces the death benefit and accrues interest.
Selling fits best when the coverage is no longer needed, the premium is a real strain, and a competitive offer meaningfully exceeds cash surrender value after tax.
Practical Next Steps
Request the carrier records now: lifetime premium history, dividend history with application method, withdrawal history, and any policy loan balance. Those documents are what turn the 2017 basis rule from a headline into a number on your return.
Separately, if you want to know whether a sale is realistic for your policy, send the policy cover page for a free policy review — the page showing carrier, policy number, face amount, and policy type. No cost, no obligation, no tax consequence. Then bring any offer and your records to a CPA before signing. Expect an independent escrow account to hold funds at closing and a state-set rescission window afterward. Call (305) 209-7183 with questions.
Frequently Asked Questions
What did the 2017 Tax Cuts and Jobs Act change for life settlements?
Two things. It eliminated the requirement that sellers reduce tax basis by cumulative cost-of-insurance charges, which lowered taxable gain for many sellers. And it added information-reporting requirements so buyers and carriers report policy sales to the IRS.
What is Form 1099-LS?
It is the information return generally filed by the buyer in a reportable policy sale to report payments made, with copies to the seller and to the insurance carrier. It is what tells the carrier a sale occurred. Verify the current 2026 form requirements and deadlines with a CPA.
What is Form 1099-SB?
It is generally filed by the insurance carrier to report the seller’s investment in the contract and the policy’s surrender amount. In practice it is the carrier’s view of your basis. Compare it against your own premium records before filing your return.
Does the basis change apply to sales made before 2017?
The provision was written to apply retroactively to transactions after a date in 2009, commonly cited as August 25, 2009. Verify that date and its current application with a tax professional. Statute-of-limitations rules generally limit how far back an amended return can reach.
Do these rules expire?
Several individual provisions of the 2017 law were enacted with expiration dates, and tax law has continued to change since. Verify whether any sunset affects the life settlement provisions for 2026 before relying on them. This is exactly the kind of detail a CPA tracks.
Did the law change how much a buyer will pay for my policy?
Not directly. Buyers price policies on death benefit, life expectancy, and projected premium cost. The tax change affects what you keep after tax, not what a buyer offers. It does make selling more attractive relative to surrendering for many sellers.
Does the viatical exclusion still exist?
Yes. IRC Section 101(g) continues to allow terminally ill insureds, and chronically ill insureds subject to limits, to exclude proceeds from income when the conditions are met, including buyer licensing requirements. Verify the 2026 definitions and limits with a CPA and an attorney.
Do state taxes follow the federal change?
Not automatically. States vary in whether and how they conform to federal definitions, and some tax capital gains as ordinary income. Ask a CPA licensed in your state how settlement proceeds are treated there for 2026.
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Related Reading
- Life Settlement Tax Basis Explained
- Are Life Settlement Proceeds Taxable
- Viatical Settlement Tax Exclusion Explained
- Life Settlement Tax Calculator Explained
- Cash Surrender Value Life Insurance
- Education Center
Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.