Question

Which of these statements is INCORRECT regarding the federal income tax treatment of Life Insurance?

a) Death benefits are generally income-tax-free to beneficiaries.
b) Cash value growth is tax-deferred.
c) Premiums paid on a life insurance policy are tax-deductible.
d) Policy loans are generally income-tax-free.

Answer 1

The incorrect statement about federal income tax and Life Insurance is that premiums paid on a life insurance policy are tax-deductible. This is generally not true for individuals, but there may be exceptions for certain businesses.

Step-by-step explanation:

The incorrect statement regarding the federal income tax treatment of Life Insurance is: c) Premiums paid on a life insurance policy are tax-deductible. This is not generally true for individual taxpayers because personal life insurance premiums are not tax-deductible on your federal income taxes. However, there are some exceptions for certain types of businesses and policies within certain limits and guidelines.

On the other hand:

• Death benefits are generally income-tax-free to beneficiaries, which is statement a).
• Cash value growth in a life insurance policy is tax-deferred, which is statement b).
• Policy loans are generally income-tax-free, assuming the policy is not a Modified Endowment Contract (MEC) and the policy stays in force, which is statement d).