South Carolina Insurance Practice Exam

Of the following dividend options, which one is considered taxable?

1. Cash payment

2. Accumulation of interest

3. Reduction of premiums

4. Paid-up additions

The correct answer is: Accumulation of interest

The option that is considered taxable is the accumulation of interest. When a policyholder chooses to have dividends accumulate interest in the insurance company, the interest earned on those dividends is treated as taxable income. This is because the accumulation option allows dividends to generate additional earnings, much like interest from a savings account. As a result, policyholders must report this income when filing their taxes. In contrast, cash payments received from dividends and reduction of premiums are generally not taxable. Cash payments are seen as a return of the policyholder's own premium payments. Similarly, using dividends to reduce future premiums doesn't generate any taxable income. Paid-up additions, which allow policyholders to purchase additional insurance coverage with dividends, also do not incur taxes at the time of their acquisition.