Regarding the Accumulation at Interest option for their life insurance dividends.

Under the accumulation-at-interest dividend option, dividends generated by a participating life insurance policy are left with the insurer rather than being paid directly to the policyowner. The insurer holds those dividends and credits interest to the accumulated balance. The critical tax distinction is between the dividend itself and the interest earned on that dividend.

Life insurance dividends generally represent a return of excess premium and ordinarily are not treated as taxable income until distributions exceed the policyowner ' s cost basis. Interest credited by the insurer, however, represents earnings on money being held by the company. That interest is taxable as ordinary income to the policyowner in the year it is credited or otherwise constructively received.

Therefore, leaving dividends with the insurer does not make the interest tax-exempt. The accumulation also does not automatically increase the policy ' s contractual death benefit or reduce future premiums; those results relate to different dividend options, such as paid-up additions or reduction of premium.

Study Guide Reference: Federal Tax Considerations for Life Insurance — taxation of policy dividends; dividend accumulation at interest; treatment of interest earnings.