Why are dividends from a mutual insurer not taxable?

Dividends from a mutual insurer are not taxable because they are considered to be a return of premium. When policyholders receive dividends from their mutual insurance policies, these payments are essentially a refund of the excess premiums they paid relative to the actual claims and expenses incurred by the insurer.

In mutual insurance, policyholders are also the owners of the company, and thus when the insurer performs well, any excess profits can be distributed back to the policyholders as dividends. Since these dividends represent a return of the money that policyholders paid rather than income earned, they are not subject to taxation.

The nature of these dividends as a return of premium is what distinguishes them from regular income, which would be taxable. This tax treatment is established in the tax code and is important for policyholders to understand, as it adds value to their investment in mutual insurance policies.