Which statement about dividends is true?

Which statement about dividends is true?

• A. Dividends are paid out of the insurer's surplus earnings for that year.
• B. Dividends are guaranteed every year and taxed as ordinary income.
• C. Dividends come from the policyholder's premium only.
• D. Dividends are always taxable and always cash.

Answer: (A)

Dividends from participating life insurance come from the insurer’s surplus earnings for the year. They are a return of excess premium, not a guaranteed part of your premium, and they depend on the insurer’s overall financial results. They can be paid in cash, left to accumulate with interest, or used to reduce future premiums or buy paid-up additions. Because they’re based on the company’s experience, they’re not guaranteed every year. They’re also not automatically taxable as ordinary income; dividends are generally tax-free up to the amount of premiums paid, with any interest earned or amounts exceeding the premiums potentially taxable. In short, the true statement reflects that dividends come from the insurer’s surplus, not from guaranteed premium returns, not always cash, and not necessarily taxable in the straightforward way.

Dividends from participating life insurance come from the insurer’s surplus earnings for the year. They are a return of excess premium, not a guaranteed part of your premium, and they depend on the insurer’s overall financial results. They can be paid in cash, left to accumulate with interest, or used to reduce future premiums or buy paid-up additions. Because they’re based on the company’s experience, they’re not guaranteed every year. They’re also not automatically taxable as ordinary income; dividends are generally tax-free up to the amount of premiums paid, with any interest earned or amounts exceeding the premiums potentially taxable. In short, the true statement reflects that dividends come from the insurer’s surplus, not from guaranteed premium returns, not always cash, and not necessarily taxable in the straightforward way.