Dividends in participating policies are guaranteed?

• A. Dividends are guaranteed to remain constant over time.
• B. Dividends are not guaranteed; they may be used to reduce premiums, buy paid-up additions, accumulate with interest, or be paid out.
• C. Dividends must be paid out every year in cash.
• D. Dividends are taxed as capital gains only.

Answer: (B)

Dividends in participating policies are not guaranteed; they depend on the insurer’s actual financial performance and available surplus. Because they are discretionary, dividends can vary from year to year rather than remaining constant. They can be taken in cash, used to reduce premiums, purchase paid-up additions (which increase the death benefit and future dividend base), or left to accumulate with interest inside the policy. They do not have to be paid out every year, and they aren’t taxed as capital gains.