PSI Life Exam Practice Test

Which dividend option is considered taxable?

1. Cash payment

2. Accumulation at interest

3. Paid-up additions

4. Reduction of premium payments

The correct answer is: Accumulation at interest

The taxable dividend option is accumulation at interest. This option refers to a scenario where the dividends earned on a life insurance policy are left to accrue interest within the policy. The interest earned on these dividends is subject to taxation in the year it is credited, as it is considered income. In contrast, cash payments are typically taxable, but they represent the receipt of cash rather than the accumulation of interest. Paid-up additions increase the death benefit and cash value of the policy and are generally not taxable as income. Reduction of premium payments directly lowers the policyholder’s future premium obligations without generating taxable income. Thus, the key point is that the accumulation of interest on dividends creates tax implications, making that option the correct choice for this question.