Which statement is true regarding policyholder dividends in mutual insurance?

Dividends in mutual insurance are typically not taxed because they are considered a return of premium rather than income. When a mutual insurance company performs well financially and has excess funds, it may choose to distribute dividends to its policyholders. These dividends represent a share of the company's surplus and essentially act as a refund of some of the premiums paid, based on the understanding that policyholders have contributed to the financial stability of the organization.

It's important to note that while dividends may increase in a profitable year, they are not guaranteed and depend on the company's overall performance. This is why the option referring to policyholder dividends being optional and not guaranteed is also relevant; dividends depend on profitability, and policyholders should not expect them every year.

Therefore, the statement regarding dividends being typically non-taxable accurately reflects the nature of mutual insurance dividends and their treatment in the eyes of tax law, reinforcing the understanding that these payments are more about equity and less about ordinary income.