Which of the following statements about accumulated interest earned on dividends from an insurance policy is TRUE?

The statement about accumulated interest earned on dividends from an insurance policy that is true is that it is taxed as ordinary income. When dividends are paid out to policyholders, they can earn interest if they are left accumulated with the insurance company. The tax treatment of this interest differs from the tax treatment of the dividends themselves.

While the actual dividends received from a life insurance policy are generally not taxable as they are considered a return of premium, any interest accrued on these dividends is considered income and thus subject to taxation. This approach aligns with the tax principles governing interest income, which classifies it under ordinary income for tax purposes.

Understanding this distinction is crucial for policyholders who may reinvest their dividends and accumulate interest, as they need to be aware of their potential tax liability on any earnings from that interest.