Oklahoma Life Producer Practice Exam

In regards to a Key Employee Life insurance policy, what is true about the premiums?

1. The premiums are tax-deductible

2. The premiums are tax-exempt

3. The premiums are not tax-deductible

4. The premiums are fully taxable

The correct answer is: The premiums are not tax-deductible

In a Key Employee Life insurance policy, the premiums are not tax-deductible. This means that the business paying for the life insurance policy on a key employee cannot deduct these premium payments as a business expense on their tax returns. This is an important aspect of such policies, as they are designed to provide financial protection for the company against the loss of a crucial employee, rather than serving as a tax advantage. It is essential to understand that while the premiums are an expense for the business, the Internal Revenue Service (IRS) does not allow those premiums to be deducted. Consequently, any death benefit received from the policy by the beneficiary is generally received tax-free, which reinforces the primary intention of the policy: to provide financial security for the business rather than yielding immediate tax benefits through deductions.