US Treasury Releases Life Insurance Reportable Policy Sale Final Regulations

At a Glance

• Life insurance companies, despite the simplification of the reporting rules, should continue to track reportable policy sales (both old and new issuers) to ensure proper reporting.
• Old issuers need to have all of the necessary information of a contract, including investment in the contract, to be able to properly report to the new issuer in a Section 1035 exchange.

On July 8, 2026, the US Treasury Department and the Internal Revenue Service (IRS) released final regulations under the life insurance policy transfer rules. The final rules generally adopt the proposed regulations that were released in May 2023 with some changes discussed below.

The new regulations are meant to address concerns with regard to changes made by Treasury regulations issued in 2019 under Section 101 for reportable policy sales that caused new contracts issued with respect to a Section 1035 transaction to be subject to the transfer-for-value rules even though no reportable policy sale was involved.

The 2017 Tax Cut and Jobs Act (TCJA) modified Section 101 of the Internal Revenue Code, which generally provides that death benefits received from life insurance are not taxable, unless the transfer-for-value rules cause some or all of the death benefits to be taxable. The modification eliminates the exception to the transfer-for-value rules for carryover basis transactions and transfers to the insured or another qualifying person in the case of a reportable policy sale.

A reportable policy sale is "the acquisition of an interest in a life insurance contract, directly or indirectly, if the acquirer has no substantial family, business, or financial relationship with the insured apart from the acquirer's interest in such life insurance contract." The Treasury regulations finalized in 2019 defined a "transfer of an interest in a life insurance contract" to include "the issuance of a policy in an exchange pursuant to section 1035". The TCJA also added Section 6050Y, which established information reporting requirements for reportable policy sales.

The following were adopted from the 2023 proposed regulations without substantial change:

1. The definition of "transfer" no longer includes the language added above about the issuance of a policy under a Section 1035 exchange. This ensures that the exchange of a policy (not already subject to the transfer-for-value rules) will not inadvertently be pulled in.
2. The characteristics of the original policy in a Section 1035 exchange carry over to the new policy. Meaning that if the proceeds from the original policy would have been excluded from gross income under Section 101, then the entire proceeds of the new policy will be excludable.
3. If the original policy in a Section 1035 exchange is subject to the reportable policy sale rules, then the new policy will be subject to those rules.

The key changes in the final regulations include:

1. The amount of "boot" received tax-free in a section 1035 exchange will reduce the amount of proceeds attributable to the old interest that is excludable from gross income.
2. "Section 1035 exchange" is expanded to include certain Section 1031 exchanges that include Section 1035(a) property.
3. The final regulations no longer require: (a) both old and new issuers to file information returns, (b) using Form 1099-SB for reporting requirements, (c) a statement sent to the policyholder, and (c) a 30-day deadline to exchange information between old and new issuers.
4. Old issuers will now be required to report on Form 1099-R for applicable exchanges, potentially using a new distribution code 7. Reporting will not be required until the IRS publishes a new final Form 1099-R reflecting this requirement.

What This Means for Insurers

Life insurance companies, despite the simplification of the reporting rules, should continue to track reportable policy sales (both old and new issuers) to ensure proper reporting; and old issuers need to have all of the necessary information of a contract, including investment in the contract, to be able to properly report to the new issuer in a Section 1035 exchange.