Arkansas Life and Health Insurance Practice Exam 2025 - Free Life and Health Insurance Practice Questions and Study Guide

When dividends received from a life insurance policy exceed the total premium paid in, the excess dividend is considered a capital gain. This is because it is a profit earned on the investment in the policy, similar to the gains realized from other types of investments such as stocks or real estate. It is important to differentiate between the total premium paid in for the policy (which is the original investment) and any dividends received on top of that amount (which represent a return on that investment and are treated as capital gains).

Options B, C, and D are incorrect:

- Non-Taxable Income: Dividends exceeding the total premium paid are not considered non-taxable income since they represent a profit or gain from the policy.

- Taxable Income: While any interest earned on the cash value of a life insurance policy may be taxable, the excess dividends received above the total premium paid are specifically categorized as capital gains.

- Tax-Deferred Income: Tax-deferred income refers to income that is earned but taxes on it are deferred to a later date. Excess dividends, in this scenario, are not categorized as tax-deferred income but rather as capital gains.