Arkansas Life and Health Insurance Practice Exam

Which of the following business disability plans can create a taxable event:

1. Business overhead expense

2. Disability buy-sell

3. Key person disability

4. Workers' compensation

The correct answer is: Business overhead expense

The correct answer is A. Business overhead expense. This type of disability plan provides coverage for the overhead expenses of a business in the event that the business owner becomes disabled. The benefits paid out under this plan are typically considered taxable income since they are meant to cover the ongoing business expenses. The other options (B, C, and D) are not typically considered taxable events. Disability buy-sell plans are used to fund a buy-sell agreement between business owners in the event of a disability. Key person disability insurance protects a business in the event that a key employee becomes disabled. Workers' compensation provides wage replacement and medical benefits to employees injured in the course of employment and is usually not taxable to the recipient.