Life Insurance✓ Verified · outline & fact-checked · Sep 2026Difficulty 2/5
Dividends paid on a participating whole life insurance policy are best described as:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Participating policies pay dividends that are a return of premium — the portion of premiums the insurer did not need because actual mortality, interest, and expense experience was better than assumed. Dividends are not guaranteed. Policyowners may take them in cash, leave them to accumulate, buy paid-up additions, reduce premium, or buy one-year term.
Why the other options are wrong
- B) Dividends are never guaranteed; they depend on the insurer's actual experience.
- C) Dividends are generally treated as a return of premium and are not taxable income (though interest earned on accumulated dividends may be taxable).
- D) Dividends do not reduce the death benefit; they are a distribution from the policy's surplus.
Memory hook
Dividends = the insurer refunds your overpayment because it guessed too cautiously. Not guaranteed, not taxable as income, not a benefit cut.