Dividends under a dividend accumulate at interest: which statement is true?

Dividends under a dividend accumulate at interest: which statement is true?

• A. Dividends are paid out to the policyowner each year as cash.
• B. Dividends are retained by the insurer and the interest on dividends is compounded annually.
• C. Dividends are taxed as capital gains.
• D. Dividends are never paid.

Answer: (D)

Dividends accumulate at interest means the insurer keeps the dividends instead of paying them out each year. The insurer credits interest on the accumulated amount, usually compounded annually, so the value grows over time. This describes the dividend option where the money stays with the company to earn interest and can later be taken as cash or used in other dividend choices. So, this is the correct concept because it directly matches the idea of dividends being retained and earning interest rather than being paid out annually as cash. The other statements describe different possibilities or tax treatment that don’t fit the accumulate-at-interest concept: cash dividends are paid out rather than retained; life insurance dividends are not taxed as capital gains (the return of premium is typically tax-free, while any interest credited is taxed); and dividends can be paid if declared—participating policies do pay them, not “never.”

Dividends accumulate at interest means the insurer keeps the dividends instead of paying them out each year. The insurer credits interest on the accumulated amount, usually compounded annually, so the value grows over time. This describes the dividend option where the money stays with the company to earn interest and can later be taken as cash or used in other dividend choices.

So, this is the correct concept because it directly matches the idea of dividends being retained and earning interest rather than being paid out annually as cash. The other statements describe different possibilities or tax treatment that don’t fit the accumulate-at-interest concept: cash dividends are paid out rather than retained; life insurance dividends are not taxed as capital gains (the return of premium is typically tax-free, while any interest credited is taxed); and dividends can be paid if declared—participating policies do pay them, not “never.”