Accumulation at interest dividend option: how it is taxed
Under the accumulation at interest dividend option, the insurer keeps the policy's dividends on deposit and credits interest on them. The dividends are not taxable, but the interest is taxable to the owner in the year it is credited, even if it is not withdrawn.
Key facts for the exam
- The insurer holds the dividends on deposit and credits interest at a guaranteed minimum rate. The owner may withdraw the fund at any time or leave it to be added to the death benefit.
- Dividends are a return of premium, not income, but the interest credited on them is income and is taxable as it is credited, whether or not the owner takes it.
- If the insured dies, the beneficiary receives the face amount plus the accumulated dividends and interest.
- It is a dividend option, not a nonforfeiture option. The nonforfeiture options are cash surrender, reduced paid-up insurance and extended term insurance.
- Other dividend options fit other goals: reduction of premium lowers the owner's cost, one-year term adds the most to the death benefit.
The trap. Leaving the money with the insurer does not defer the tax on the interest. And accumulation at interest is a dividend option, not a nonforfeiture option.
How the exam asks about it
- How is the interest credited under the accumulation at interest dividend option treated for tax?
- What happens to dividends left with the insurer under the accumulation at interest option?
- An insured dies with dividends accumulated at interest still on deposit. What does the beneficiary receive?
- Which three nonforfeiture options does a permanent policy customarily make available?
- Which owner is the reduction of premium dividend option best suited to?
- Which owner would the one-year term dividend option suit?
Where it sits on your state's exam
| State exam | Share of exam | ≈ Scored questions | Outline section |
|---|---|---|---|
| New York | 20% | 20 of 100 | Life Insurance Policy Provisions, Options, and Riders |