Life insurance dividends are a return of a portion of the premiums you paid on your policy. you may not also realize that not 100% of the premium paid add to basis,. if your policy has a term insurance provision, part of the premium goes to pay that and does not increase basis.
the reason the dividends are tax free is because the premium payments aren't deductible.
see this link from a person claiming to be an insurance expert
https://www.fool.com/the-ascent/insurance/life/life-insurance-dividends/#:~:text=Life%20insurance%20...
