Question

ABC Corporation purchases and is beneficiary of an individual disability income insurance policy on a key employee. Which of the following statements is true?

A. premiums paid by the company are tax-deductible
B. benefits are tax-deductible to the key employee
C. benefits are received tax free by the company
D. premiums paid by the company are tax-deductible to the key employee

Answer 1

Option (C), The true statement about an individual disability income insurance policy purchased by ABC Corporation on a key employee is that the benefits are received tax free by the company.

Step-by-step explanation:

When ABC Corporation purchases an individual disability income insurance policy on a key employee and is the beneficiary, certain tax implications apply. The correct statement in this context is: benefits are received tax free by the company. This is because the general rule for corporate-owned life insurance policies is that the premiums are not deductible, but the benefits received due to an event such as the disability of the insured key employee are typically not subject to tax.

Thus, while the premiums are not tax-deductible to the company, the policy does help safeguard against financial loss due to the absence of a valuable team member. It's important to note that individual circumstances can vary, and tax regulations can change, so businesses should consult with a tax professional or legal advisor to understand the specific implications for their situation.