Concerning the taxation of a Key Person Life Insurance Policy, which statement is correct?

In the context of Key Person Life Insurance policies, the correct understanding revolves around the tax treatment of premiums and death benefits. For Key Person policies, the premiums paid by the business for the life insurance on a key employee (or key person) are not tax deductible as a business expense. This is because the IRS does not allow businesses to deduct premiums on policies where the company is the beneficiary.

Regarding the death benefit, when a key person insured under such a policy passes away, the death benefit proceeds received by the business are generally not taxable. This means the company receives the full death benefit amount without incurring tax liabilities.

Thus, the correct statement captures this duality. It accurately reflects that premiums are not deductible and the death benefit received by the company is not taxable, highlighting the favorable tax treatment of the benefit itself despite the non-deductibility of the premiums.