California Life-Only & Accident and Health AgentLife InsuranceHard
A business owner purchases a life insurance policy on themselves, naming their business as the beneficiary. The premiums paid by the business are $5,000 annually. If the business owner dies and the death benefit of $1,000,000 is paid to the business, what are the tax implications for the business regarding the premiums paid and the death benefit received?
- APremiums are tax-deductible, and the death benefit is taxable income.
- BPremiums are not tax-deductible, and the death benefit is generally tax-free.
- CPremiums are tax-deductible, and the death benefit is tax-free up to $500,000.
- DPremiums are not tax-deductible, and the death benefit is taxable as capital gains.
Show answer & explanationAnswer & explanation
Correct answer: B. Premiums are not tax-deductible, and the death benefit is generally tax-free.
Life insurance premiums paid by a business when it is the beneficiary are generally not tax-deductible. Conversely, the death benefit received by the business as a beneficiary is generally exempt from federal income tax. This is a common arrangement for 'key person' insurance.
Why the other options are wrong
- A. Premiums are generally not deductible when the business is the beneficiary, and the death benefit is typically tax-free.
- C. Premiums are not deductible, and there's no $500,000 limit for tax-free death benefits in this context.
- D. Death benefits are typically tax-free income, not capital gains, and premiums are not deductible.
Taxation of Business-Owned Life Insurance
When a business owns a life insurance policy on an employee/owner and is the beneficiary, premiums are generally not tax-deductible, but the death benefit received by the business is typically tax-free.
- Premiums paid by business (as owner/beneficiary) are not tax-deductible.
- Death benefit received by business is generally tax-free income.
- Applies to 'Key Person' insurance.
- Purpose is to indemnify business for loss of key individual.
Memory trick: Life insurance taxes: 'Give and Take' with the IRS.