Dividends on a whole life insurance policy are generally not taxed as income to you. Instead, they are considered a return of your premium regardless of whether you receive them in cash, use them to purchase additional coverage, use them to reduce future premiums, or leave them invested with the insurance company.
In general, amounts received over the life of the policy become taxable at the point they exceed the premiums paid for the policy. You could receive taxable income when you surrender the policy.
See IRS Revenue Ruling 2009-13 for a detailed example.
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