Leyh’s Outdoor Adventures, Inc., would like to begin providing life insurance coverage for its employees. Three employees are officers; each earns $100,000 per year. The other three employees each earn $40,000 per year. Ricardo, president of Leyh’s, comes to you for advice on how to provide the coverage. He provides three alternatives, each of which will cost Leyh’s $15,000 per year (an average of $2,500 per employee):

Option 1—Give each employee $2,500 to purchase coverage.

Option 2—Buy a group term life insurance policy under which each employee would be covered for an amount equal to twice her or his annual salary.

Option 3—Buy a whole life insurance policy under which each employee would receive $100,000 worth of coverage.

Ricardo asks you to evaluate these options and advise him on the tax consequences of each. Write a letter to Ricardo explaining the tax effects of each option. Include your recommendation of the option that provides the greatest overall tax benefits.