Which statement regarding policy dividends is NOT true?

In the context of policy dividends, the correct answer addresses the tax implications related to the interest earned on those dividends. Dividends from a life insurance policy represent a return of excess premiums, and they are generally not considered taxable income when received by the policyholder. However, if the policyholder chooses to leave those dividends in the insurance company to accumulate interest, the interest earned on those accumulated dividends is indeed subject to taxation.

This illustrates that while the dividends themselves are a return of premium and thus not taxable, the interest generated from those dividends is treated as income and must be reported on tax returns. Understanding the tax implications of policy dividends and the interest they may accrue is critical for policyholders to manage their financial planning appropriately.

Regarding the other statements, they are fundamentally true. Dividends are indeed a return of excess premium, are not taxable when distributed, and any dividends reported in the insurer's financial statements are typically included, not excluded. This information provides clarity on how dividends operate within the framework of insurance policies and their tax treatments.