Life Policy ProvisionsQuestion 164 of 716
Policy dividends paid on participating life insurance policies are generally treated for federal income-tax purposes as which of the following?
a.Ordinary taxable income in the year credited, reported in full to the owner on a Form 1099-DIV
b.A non-taxable return of premium, until cumulative dividends exceed the premiums paid
c.Taxable wages, subject to Social Security and Medicare withholding by the issuing insurer
d.Capital gains, taxed at long-term rates once the policy has been held for more than a year
Explanation
Dividends on participating life policies are considered a return of unused premium and are generally not taxable. They become taxable only to the extent cumulative dividends received exceed total premiums paid into the policy, or when held at interest (the interest itself is taxable).
Law Reference: Cal. Ins. Code §10110This topic, taught in full in the California Life & Health Insurance Producer Exam guide. California Life & Health Insurance Producer Exam — Complete Study Guide (2026) — PDF + EPUB, $19.99 · 14-day refund →
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Related questions on this topic
- Which life-income settlement option provides the largest periodic payment to a single beneficiary, but stops entirely at that beneficiary's death with no refund?
- Which nonforfeiture option uses the cash value of a lapsed permanent policy to keep the same face amount in force as term insurance for as long as the cash value will last?
- An owner of a lapsed whole life policy elects the reduced paid-up nonforfeiture option. What is the result?
- Which dividend option uses the dividend to purchase a small amount of additional permanent life insurance with its own cash value, increasing both the death benefit and the cash value?
- An insured names her spouse as primary beneficiary on an irrevocable basis. Several years later she wants to change the beneficiary. What must she do?
- An insured and her primary beneficiary die in the same auto accident, and it cannot be determined who died first. Under the Uniform Simultaneous Death Act adopted in California, how are the proceeds typically distributed?
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PrepPass team · Verified against California Life & Health Insurance License Exam · How we review
Reviewed by John Zihao Zhang — California-Licensed Life Insurance Agent (CA Dept. of Insurance License #4396095 — verify)