Question

Which of the following statements about key person insurance is CORRECT?

A) The business may take a tax deduction for premiums paid.
B) The death proceeds are taxable.
C) It can be considered a business asset.
D) The key employee's family is the beneficiary of the policy.

Answer 1

Key person insurance can be considered a business asset. This type of policy is purchased by a company on a vital employee and compensates the business in case of the employee's death or incapacity. The premiums are paid by the business, and death proceeds are usually tax-free.

Step-by-step explanation:

The correct statement about key person insurance is that it can be considered a business asset. Key person insurance is a policy taken out by a business on the life of an employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The purpose of this insurance is to compensate the business for financial losses that would arise from the death or extended incapacity of the important member of the business.

Under most circumstances:

• The business pays the insurance premiums, which are not typically tax-deductible.
• The death proceeds received by the business on the death of the insured employee are usually received tax-free.
• The policy can indeed be listed as an asset on the business's balance sheet if it has a cash value component.
• The beneficiary of the policy is the business itself, not the key employee's family.