Arkansas Life and Health Insurance Practice Exam

Why are dividends not taxable as income when paid out to a participating policyholder?

1. They are considered a capital gain

2. They represent a return of a portion of the premium paid

3. They are classified as gifts

4. They are considered interest

The correct answer is: They are considered a capital gain

Dividends paid out to a participating policyholder are not taxable as income because they are considered a return of a portion of the premium paid. This means that the policyholder is essentially receiving back a portion of the money they have already paid into the policy, rather than earning additional income. This is why dividends are not classified as taxable income.