In the nematode C. elegans, insulin signaling regulates development and aging in response to the secretion of numerous insulin peptides. Here, we describe a novel, non-signaling isoform of the nematode insulin receptor (IR), DAF-2B, that modulates insulin signaling by sequestration of insulin peptides. DAF-2B arises via alternative splicing and retains the extracellular ligand binding domain but lacks the intracellular signaling domain. A daf-2b splicing reporter revealed active regulation of this transcript through development, particularly in the dauer larva, a diapause stage associated with longevity. CRISPR knock-in of mScarlet into the daf-2b genomic locus confirmed that DAF-2B is expressed in vivo and is likely secreted. Genetic studies indicate that DAF-2B influences dauer entry, dauer recovery and adult lifespan by altering insulin sensitivity according to the prevailing insulin milieu. Thus, in C. elegans alternative splicing at the daf-2 locus generates a truncated IR that fine-tunes insulin signaling in response to the environment.