Washington Life Producer Practice Exam

Which of the following dividend options is considered taxable?

1. Cash Payment

2. Reduction of Premiums

3. Accumulation at Interest

4. Paid-Up Additions

The correct answer is: Accumulation at Interest

The option that is considered taxable is the accumulation at interest. When dividends are paid to a policyholder and they choose to have those dividends accumulate at interest, the interest earned on that accumulated amount is subject to income tax. This is because the IRS views the interest as a form of income generated from the investment of the policyholder's dividends. In contrast, cash payments received as dividends can be considered a return of premium and are generally not taxable up to the amount of premiums paid into the policy. Reduction of premiums involves applying dividends to future premium payments, which also does not create any taxable event. Paid-up additions allow policyholders to use dividends to purchase additional life insurance coverage; these additions are not taxable when they are received or used. Understanding the tax implications of each dividend option is crucial for policyholders to make informed decisions about their insurance benefits and financial planning.