Life & Health Insurance Exam (National Portion)Life InsuranceMedium
An individual owns a participating whole life insurance policy. Which of the following statements is TRUE regarding policy dividends?
- ADividends are guaranteed and are considered taxable income.
- BDividends are a return of unused premium and are not taxable.
- CDividends represent a share of the company's profits and are always paid in cash.
- DDividends are only paid if the policy's cash value exceeds the face amount.
Show answer & explanationAnswer & explanation
Correct answer: B. Dividends are a return of unused premium and are not taxable.
Policy dividends from a participating life insurance policy are considered a return of unused premium, not taxable income. They are not guaranteed and are not necessarily paid in cash.
Why the other options are wrong
- A. Dividends are never guaranteed and are generally not taxable.
- C. Dividends are a share of divisible surplus, not necessarily profit, and can be used in several ways, not just cash.
- D. Dividends are based on company performance, not the relationship between cash value and face amount.
Policy Dividends (Life Insurance)
A refund of an overpayment of premium from a participating life insurance policy, resulting from favorable mortality, interest, and expense experience.
- Not guaranteed.
- Generally not taxable income (considered a return of premium).
- Can be taken in cash, applied to premiums, used to buy paid-up additions, or left to accumulate interest.
Memory trick: Dividends are like a 'premium rebate' – not new money, just a refund.