AD Banker Comprehensive Practice Exam

Which policy allows a business to deduct premiums paid?

1. An individually purchased disability income policy

2. A disability income policy used to fund a Buy-Sell Agreement

3. Business overhead expense insurance

4. A disability policy on a key employee

The correct answer is: Business overhead expense insurance

Business overhead expense insurance is specifically designed to cover the ongoing expenses of a business when the owner becomes disabled. This type of policy allows business owners to ensure that essential expenses such as rent, utilities, and employee salaries can be paid even when they cannot actively manage the business due to a disability. One of the key tax benefits of business overhead expense insurance is that the premiums paid for this coverage are typically tax-deductible as business expenses. This means that the business can reduce its taxable income by the amount spent on these premiums, providing a financial advantage. In contrast, individually purchased disability income policies, policies used for funding a Buy-Sell Agreement, and those on key employees generally do not offer the same tax-deductible benefits when premiums are paid. The premiums for these policies are often paid with after-tax dollars, meaning the business does not receive a deduction for those payments. Thus, the correct choice, business overhead expense insurance, stands out because of its unique ability to provide both coverage for essential business expenses during disability and a tax deduction for the premiums paid.