A business buys a life insurance policy on a key employee, owns the policy, and is the beneficiary. Under IRC §264, the premiums the business pays on this policy are:

Why A is correct

Under IRC §264, no deduction is allowed for premiums on life insurance covering an individual if the taxpayer paying the premium is directly or indirectly a beneficiary of the policy. A key-person policy, where the business is owner and beneficiary, falls squarely in this rule, so the premiums are not deductible. The tax symmetry is that the death benefit is received income-tax-free under §101(a). The business should view the premiums as nondeductible but the proceeds as a tax-free recovery of the financial loss caused by the employee's death.

Why the other options are wrong

• B) Despite being a business expense, §264 specifically denies the deduction for life insurance premiums when the payer is directly or indirectly a beneficiary. The denial overrides the expense rule.
• C) There is no $50,000 deduction threshold for key-person coverage; the §264 denial applies to the full premium regardless of the coverage amount. No part of the premium is deductible.
• D) Deductibility does not depend on when death occurs; the premiums are nondeductible each year the policy is in force, with or without a claim. The timing of death changes nothing.

Memory hook

Beneficiary = no deduction. Key-person premiums are nondeductible but the payout is tax-free.