Student Question of the Week: Insurance Policy Dividends

Student Question from Margie L
Course: Insurance Planning
Student Question:
Insurance policy dividends may be taxable if they are paid in cash to the policy owner, but what about dividends that remain in the policy to purchase additional coverage (Paid-Up Additions)? Are those dividends non-taxable as long as the coverage is not lapsed or surrendered?
Instructor Response:
Hi Margie!
Great question! So, regardless of whether you take the cash, keep them on deposit with the insurer, or use them to purchase paid-up additions, ALL dividend payments are considered a return of premium. As such, they won’t be taxed unless they exceed premium payments. But again, whether the dividend payment is taken in cash or used to buy paid-up additions, there is no difference in regards to tax treatment.
Let me know if you have any other questions here!