Oklahoma Life Producer Practice Exam

What is the tax status of the death benefit from a Key Employee Life insurance policy?

1. It is fully taxable

2. It is partially taxable

3. It is not taxable

4. It is only taxable for business owners

The correct answer is: It is not taxable

The death benefit from a Key Employee Life insurance policy is typically not taxable to the beneficiary when the insured employee passes away. This means that the amount received by the business or the designated beneficiary is generally excluded from taxable income, which is a significant advantage for businesses that rely on key employees. This tax treatment is rooted in the principle that life insurance proceeds are designed to provide financial protection and support in the event of an employee's death. The funds can be used by the company to cover costs associated with the loss, such as recruiting and training a replacement, maintaining operational continuity, or compensating for lost revenue, without the tax burden that would otherwise reduce the available resources. Other choices imply different tax statuses that do not align with the common understanding of life insurance benefits regarding Key Employee policies.