Purchased one-payment life policy for $10,000. Company was failing, so Adviser said take out loan ($11,000) that did not have to be paid back. Still left about $4K, which was eaten up by loan fees and the policy lapsed in 2010. Now have 1099 for $35,000 minus the $10,000 that I originally put up. Can't re-instate policy. Insurer states that they had to issue 1099 because they credited that amount to the policy and that the interest they charged (8%) could not be used as an offset. Any thoughts regarding how I can offset; loss? challenge?

The company should issue you a 1099 only for the value you receive that is in excess of the premiums you paid for the insurance. If you bought the policy for $10K, and that was your only payment, then they're saying you received $35K back either in the loan you took or in fees that accrued that you didn't pay back out of your own cash. Off hand that sounds pretty excesive. Do you have statements of account that shows how they arrived at the $35K figure? Unfortunately I don't see using interest you paid as some sort of "offset" against this.

Did your "advisor" tell you that letting the policy lapse would result in such a huge tax bite to you? If not - I certainly hope you never, ever listen to anything that so-called "advisor" has to say in the future.

That Advisor is dead. The company claims that under the tax laws they must report interest even though it was more than offset by their interest on the loan, which wasn't deductible for me. I wonder if they reported what they charged me for the loan? I think I'll try an appeal to IRS. If nothing else it will clue them to the insurer's gain.

That Advisor is dead. The company claims that under the tax laws they must report interest even though it was more than offset by their interest on the loan, which wasn't deductible for me. I wonder if they reported what they charged me for the loan? I think I'll try an appeal to IRS. If nothing else it will clue them to the insurer's gain.
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Before trying an appeal to the IRS (who will simply tell you that you must report the 1099-R amount as income), I suggest that you contact the insurance company to get an accounting of the $35K amount. They must be able to justify it.

Their position is that they were obligated to give me 4% (or more) per year, contractually, and that it must be reported. My contention is that they could not have done that on the amount that remained, about $3000. Going to discuss it with the IRS soon, but don't expect any sym[athy.

Well so many things, first a single payment life policy if you take out a loan against cash value, the other cash value does not get eaten up by fees. Since there are none, loan would not eat up that much in amount.

** and single prem life policies are very poor investments and anyone who wants to "sell" you one, is only doing that since they get a big ( very very big) commission on it.

Side note, not asked, never use a "advisor" who is receiving commission on what they sell you.