Kentucky Health Insurance Practice Exam

Under a key person disability income policy, premium payments are?

1. Are made by the business and are tax-deductible

2. Are made by the business and are not tax deductible

3. Are made by the employee and are not tax deductible

4. Are made by the employee and are tax free

The correct answer is: Are made by the business and are not tax deductible

In a key person disability income policy, the correct understanding is that the premiums are made by the business and are not tax-deductible. A key person policy is designed to provide financial protection to a business when an essential employee, such as an executive or owner, becomes disabled and is unable to work. The business pays the premium for the policy to secure the benefit. While the premiums paid by the business are an expense incurred for the purpose of protecting the company's financial interests, they do not qualify as a deductible expense for tax purposes. Thus, when the benefit is paid out due to a key person's disability, the benefits received by the business are typically tax-free, but the premiums themselves do not reduce the taxable income of the business. Understanding this aspect of key person policies is crucial for business owners as it influences their financial planning and tax strategies. The nature of the payments and benefits associated with key person disability income insurance is an important element in grasping how these types of policies function within a business structure.