Dividends paid on a participating life insurance policy are generally treated for federal tax purposes as:

Explanation

Policy dividends are considered a return of a portion of the premium the owner overpaid, so they are generally not taxable; only if cumulative dividends eventually exceed the total premiums paid would the excess become taxable. They are not automatically taxable income, not capital gains, and not deductible. Note that this differs from the interest a dividend earns if left to accumulate, which is taxable. The dividend itself is a nontaxable return of premium.