Question

Which of the following statements regarding key person insurance is NOT correct?

A) Key person life insurance indemnifies a business for financial loss caused by the death of a key employee or key executive.
B) Premiums for a key person life insurance policy are a tax-deductible expense to the business.
C) The business may borrow from the cash value of a permanent key person life insurance policy.
D) The policy's death proceeds received by the business are not taxable.

Answer 1

The incorrect statement regarding key person insurance is that premiums paid for the policy are a tax-deductible business expense, as the IRS typically does not allow such deductions.

Step-by-step explanation:

Regarding key person insurance, the statement that is NOT correct is B) Premiums for a key person life insurance policy are a tax-deductible expense to the business. In general, the Internal Revenue Service (IRS) does not allow businesses to deduct premiums paid on a life insurance policy where the business is the beneficiary. This is because the death proceeds received are typically not taxable income to the business. Statement A) is correct as key person insurance is designed to indemnify the business for financial loss caused by the death of a key employee or executive. Statement C) is also correct; a business may borrow against the cash value of a permanent life insurance policy if needed, although the loan must be repaid with interest. Statement D) is accurate as well, since the policy's death proceeds received by the business are generally not taxable.