Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A business owner has a $1,000,000 Key Person life insurance policy on their top sales executive. The business pays the premiums and is the beneficiary. If the executive dies, how will the death benefit be treated for tax purposes?
- AThe premiums paid by the business are tax-deductible.
- BThe death benefit will be taxable income to the business.
- CThe death benefit will be taxable to the executive's estate.
- DThe death benefit will be received tax-free by the business.
Show answer & explanationAnswer & explanation
Correct answer: D. The death benefit will be received tax-free by the business.
Key Person life insurance death benefits are generally received income tax-free by the business, similar to how individual life insurance death benefits are tax-free to beneficiaries, provided the business continues to pay the premiums.
Why the other options are wrong
- A. Premiums paid for Key Person life insurance are not tax-deductible for the business.
- B. Death benefits from life insurance policies are typically not considered taxable income.
- C. The executive's estate is not the beneficiary, so the death benefit is not taxable to their estate.
Key Person Life Insurance Taxation
In Key Person life insurance, the death benefit received by the business beneficiary is generally income tax-free, but the premiums paid by the business are not tax-deductible.
- Business pays premiums and is beneficiary.
- Death benefit is received tax-free by the business.
- Premiums are NOT tax-deductible for the business.
Memory trick: Key Person: Premiums OUT (no deduction), Benefit IN (no tax).