Which statement BEST describes the tax treatment of disability buy-sell insurance policies?

The correct statement regarding the tax treatment of disability buy-sell insurance policies is that policy proceeds are typically received income tax-free. This means that when a business receives the benefits from such a policy due to the disability of an owner or key partner, those funds are generally not subject to federal income tax. This tax-free status is significant because it allows the business to utilize the received funds to continue operations, buy out the disabled owner's interest, or meet other financial obligations without the burden of tax liability.

In contrast, stating that benefits are taxable to the business entity does not align with the tax treatment of such proceeds, as they are usually designed specifically to avoid taxation. Similarly, the notion that premiums are typically tax-deductible is also incorrect; premiums paid for disability buy-sell insurance are generally not deductible as a business expense. Lastly, while benefits being paid to the disabled insured is true, it does not reflect the primary focus of tax treatment, which emphasizes that the proceeds from the policy are received tax-free by the business rather than focusing on who specifically receives the benefit.