Which statement about dividends from life insurance policies is FALSE?

A dividend from a life insurance policy is often viewed as a return of excess premium that the insurance company has collected, which means policyholders may receive dividends based on the company’s financial performance and other factors. This aligns with the idea that dividends reflect the surplus earnings of the insurer that can be distributed back to policyholders.

When it comes to the taxation of dividends, any interest earned on those dividends while they are left with the insurance company is indeed considered taxable income. This aspect underpins the principle that while the principal dividend amount itself is not taxable, any additional growth or interest on it is treated differently for tax purposes.

However, it is important to note that dividends are not guaranteed. They are contingent on the company’s performance and are declared by the insurer each year. This inherently creates some uncertainty about whether a policyholder will receive them, which is why the statement claiming dividends are guaranteed is false.

Another characteristic of dividends is that when they are paid out, they can generally be used to increase the cash value of the policy or offset premiums. Nevertheless, the ability to use dividends in this manner does not negate the fact that they are not guaranteed payments.