Dividends payable to a policy owner are best described as:

• A. A distribution of surplus earnings to the policyholder
• B. A mandatory interest payment on the policy's cash value
• C. A return of premium that is taxable as income
• D. A liability that must be repaid by the policy owner

Answer: (A)

Verified step by step guidance

1. Understand the concept of dividends payable: In financial accounting, dividends payable refer to amounts declared by a company to be distributed to shareholders or policyholders. For insurance policies, dividends are typically a distribution of surplus earnings.
2. Analyze the options provided: Carefully read each option and determine which aligns with the definition of dividends payable. For example, consider whether dividends are mandatory payments, taxable returns, or liabilities.
3. Clarify the nature of surplus earnings: Surplus earnings are the excess funds generated by an entity after covering all expenses and obligations. These are often distributed to stakeholders, such as policyholders, as a reward for their participation.
4. Evaluate the correct answer: Based on the definition and characteristics of dividends payable, identify the option that correctly describes them as a distribution of surplus earnings to the policyholder.
5. Confirm the reasoning: Ensure that the selected answer aligns with the principles of financial accounting and the context of insurance policies, where dividends are typically non-taxable and not mandatory payments or liabilities.