PSI Ohio Insurance Practice Exam

When are dividends paid from a participating policy considered taxable?

1. When the amount received exceeds the total amount of premiums paid for the policy.

2. When dividends are reinvested into another policy.

3. When the insured voluntarily surrenders the policy.

4. When the policyholder receives them in cash form.

The correct answer is: When the amount received exceeds the total amount of premiums paid for the policy.

Dividends paid from a participating policy are considered taxable when the amount received exceeds the total amount of premiums paid for the policy. This is due to the fact that dividends can be viewed as a return of excess premium, and thus, any amount received that surpasses the total premiums paid is seen as income and therefore subject to taxation. In the context of the other options, dividends that are reinvested into another policy do not trigger a tax event at the point of reinvestment; the taxation would occur only if the dividends exceed the total premiums paid. Similarly, if the insured voluntarily surrenders the policy, there may be different tax implications depending on the policy's status, but that situation directly does not relate to when dividends are taxable. Lastly, receiving dividends in cash form is not in itself a trigger for taxation unless the dividends received surpass the total premiums paid. Thus, the criterion for taxation hinges on the relationship between the received dividends and the total premiums previously paid.