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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!

Dan