Final answer:
The incorrect statement is that the key employee is the policyowner and beneficiary. In a Key Employee Life policy, the company is both the policy owner and beneficiary, and while premiums aren't tax-deductible, the death benefit is generally received tax-free.
Step-by-step explanation:
The statement which is INCORRECT about a Key Employee Life policy is D) The key employee is the policyowner and beneficiary. In a Key Employee Life insurance policy, the company purchases a life insurance policy on a key employee, pays the premiums, and is also the beneficiary of the policy. This type of policy is taken out to protect the company against the financial loss that would occur if a key employee, whose services contribute significantly to the success of the business, were to pass away unexpectedly.
The correct statements about a Key Employee Life policy are: A) The company is the policy owner and beneficiary, B) Premiums paid by the company are not tax-deductible, and C) The death benefit is generally not tax-deductible to the company. The reason why premiums are not tax-deductible is that the IRS considers these payments as a form of business expense for life insurance, which doesn't qualify as a deductible expense under current tax laws. However, if the death benefit is paid due to the death of the key employee, it is usually received tax-free by the company.