Washington State Insurance Practice Exam

How are dividends from a mutual insurance company classified?

1. Non-taxable

2. Taxable Income

3. Capital Gains

4. Interest

The correct answer is: Non-taxable

Dividends from a mutual insurance company are classified as non-taxable because they are considered a return of excess premiums that were paid by the policyholders. Policyholders of a mutual insurance company are essentially owners of the company, so when the company has a surplus, it is distributed back to the policyholders in the form of dividends. These dividends are not considered income, but rather a return of a portion of the premiums paid. Therefore, they are not subject to taxation.