AD Banker Comprehensive Practice Exam

On which of the following policies would any proceeds be taxable?

1. Business overhead expense insurance

2. Death benefit proceeds of an individually purchased life insurance policy

3. A key employee disability income policy

4. A disability policy used to fund a buy-sell agreement

The correct answer is: Business overhead expense insurance

Business overhead expense insurance is designed to cover the operating expenses of a business during the period in which the owner cannot work due to disability or illness. The benefits paid to the business are considered taxable income, as they are used to replace lost income and cover ongoing business expenses such as rent, utilities, and salaries. Unlike other types of insurance proceeds that might be tax-free, such as death benefits from a life insurance policy, the proceeds from business overhead expense insurance are directly tied to the business's revenue and are therefore subject to income tax. This tax implication is significant for business owners to consider when planning for potential disabilities and ensuring they have adequate coverage while managing their tax liabilities effectively.