Which of the following statements about dividends in life insurance is true?

Dividends in life insurance are a way for participating policyholders to receive a share of the insurer's profits, primarily from mutual insurance companies. When a policy is designated as a participating policy, it means that the policyholder is eligible to receive dividends based on the company’s performance. This can happen when the company has excess earnings that exceed the expected costs of claims and expenses.

The statement that dividends are paid only on participating policies is correct, highlighting the distinction between participating and non-participating policies. Non-participating policies do not share in the insurer's profits and therefore do not pay dividends. This unique feature of participating policies is what enables policyholders to potentially benefit financially from the company’s successful operations.

While the other options suggest circumstances surrounding dividends that are not accurate. For example, dividends are not always taxable when received, depending on the circumstances and benefits they represent. They are also not guaranteed to be paid every year since they depend on the insurer’s financial performance. Lastly, not all policies, such as universal life or term insurance, offer dividends, as only participating policies do.