Are Life Insurance Dividends Taxable?

Life insurance can be taxable, but most of the time they are not. This is the case because dividends enjoy a special treatment being recognized as a refund of the premium that you paid to the policy. Dividends are normally associated with whole life insurance, but they are not exclusive to whole life policies. Some companies do pay dividends to term life, disability income, long term care, annuities, and universal life policies. Making a life insurance dividend taxable occurs when you take the dividend in cash AND you have no cost basis in your policy. Under these circumstances, you'll owe ordinary income taxes on the dividend payment.