How are dividends treated in a policy where they are accumulated at interest?

In a policy where dividends are accumulated at interest, the correct interpretation is that they are retained by the insurer, and interest is computed on those dividends annually. This means that rather than receiving the dividends as cash payments, the policyholder’s dividends remain with the insurer and grow over time as interest is added to them.

Accumulating dividends at interest is a strategy that allows policyholders to potentially increase their investment in the policy. The retained dividends can increase the policy's cash value, providing financial flexibility for the policyholder in the future if they choose to withdraw or borrow against them.

In contrast to this concept, the options that suggest dividends are paid out quarterly or increase the death benefit automatically do not align with the treatment of accumulated dividends. Additionally, considering dividends as taxable income immediately does not apply either since the taxation of dividends typically occurs when they are actually distributed to the policyholder.