Dividends paid to policyowners in a mutual company are described as:

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Dividends paid to policyowners in a mutual company are non-taxable because they represent a return of part of the premiums paid, not ordinary income. They’re considered a return of the policy’s cost basis and are generally tax-free up to the amount of premiums you’ve paid. If you let dividends accumulate with the company, any interest credited to those accumulations is taxable in the year it’s credited. If you surrender the policy or cash out, only the portion that exceeds the total premiums paid may be taxable as a gain. So, the dividend itself is not taxed, which is why this choice is correct. The other options don’t fit because dividends aren’t treated as taxable income, capital gains, or tax credits.