Which statement BEST describes disability buy-sell insurance policies?

• A. Premiums are typically tax-deductible
• B. Benefits are taxable to the business entity
• C. Benefits are typically tax-free
• D. Benefits are paid to the disabled insured

Answer: (C)

Disability buy-sell policies are designed so the business owns the policy and is the beneficiary, with funds used to buy out a disabled owner’s share. The key tax point is that the payout from this policy is typically received tax-free by the business, which makes funds readily available to complete the buyout without creating extra tax liability.

That structure means the payout isn’t intended for the disabled owner, and it isn’t treated as taxable income to the business in most cases. Other statements miss the purpose or the tax treatment: premiums aren’t the focus of the benefit’s tax treatment, and the benefit isn’t paid to the disabled owner, nor is it generally taxed to the business.