Understanding Policy Dividends as a Return of Premium (Non-Taxable)

A key tax benefit of participating Whole Life insurance is the way the Internal Revenue Service (IRS) treats policy dividends. Unlike dividends received from stocks or mutual funds, life insurance dividends are generally not considered investment income and are therefore **not taxable** up to a specific limit.

The IRS Perspective

The IRS views the dividend as a **return of premium**—a refund of the overpayment made by the policyholder. This is because Whole Life premiums are set conservatively high to ensure the company can meet its guaranteed obligations under all economic conditions.

The Taxation Rule

Dividends are tax-free until the cumulative amount of dividends received exceeds the policyholder’s **Cost Basis** (the total amount of premiums paid). Once the dividends received exceed the Cost Basis, any additional dividend payments are then considered taxable income.

• Most Policyholders: The vast majority of policyholders never receive enough dividends to exceed their total premiums, meaning their dividends remain entirely tax-free throughout the life of the policy.

Disclaimer: This content is for informational purposes only and is not financial or legal advice. Always consult a tax professional for guidance on specific dividend taxation in your policy.