Oklahoma Life Producer Practice Exam

How are the death benefits of Key Employee Life insurance treated for tax purposes?

1. Fully deductible

2. Fully tax-exempt

3. Partially taxable

4. Not taxable

The correct answer is: Not taxable

Key Employee Life Insurance provides a death benefit that is generally not subject to income tax when paid out to the beneficiary, which is typically the employer or business. This tax treatment aligns with IRS regulations that state that life insurance proceeds are generally received income tax-free. The death benefit would not be included in the gross income of the recipient as it is considered a form of compensation for the loss of the key employee, intended to help the business continue operating in the absence of that individual. Furthermore, while the premiums paid for this type of insurance might not be deductible as a business expense by the employer if they are the beneficiary, the benefit itself remains tax-exempt upon payout. Understanding the tax implications of Key Employee Life Insurance is crucial for business owners as it impacts financial planning and the potential for the business to recover from the untimely loss of essential personnel.