What is typically not a deductible business expense in Key Person Life Insurance?

In the context of Key Person Life Insurance, death benefits are typically not deductible as a business expense. This is because the primary purpose of Key Person Life Insurance is to provide financial protection to the business in the event of the untimely death of a key employee. When the insured individual passes away, the death benefit is paid out to the business, which can then use those funds to cover costs associated with the loss of that key person, such as hiring a replacement or addressing any impact on revenue.

However, since the death benefits received by the business are considered a non-taxable event, they do not qualify as a deductible expense on the business's tax return. This aligns with tax regulations, which generally prohibit the deduction of amounts that do not represent a business loss but rather a form of income replacement.

On the other hand, premiums paid for the life insurance policy and any administrative costs associated with managing the policy can often be deducted as business expenses because they are necessary costs incurred in the operation of the business. Similarly, any claim payments that a business might make related to the policy would generally pertain to administrative or deductive expenses, but the death benefit itself is treated separately due to its nature as a non-taxable benefit to the business.