Texas General Lines — Life, Accident, Health and HMOGeneral InsuranceEasy
An insurance company has a surplus of $5 million and pays dividends to its policyholders. This company is structured to return profits to its owners, who are the policyholders themselves. What type of insurance company is this?
- AStock company
- BFraternal benefit society
- CReciprocal exchange
- DMutual company
Show answer & explanationAnswer & explanation
Correct answer: D. Mutual company
A mutual company is owned by its policyholders, who receive dividends as a return of divisible surplus. These dividends are not guaranteed and are not considered taxable income because they are a return of unused premium.
Why the other options are wrong
- A. A stock company is owned by its stockholders, not policyholders, and pays dividends to stockholders.
- B. A fraternal benefit society is a non-profit organization that provides insurance to its members, often with a common bond.
- C. A reciprocal exchange is an unincorporated group of individuals who agree to insure each other.
Mutual Company
An insurance company owned by its policyholders, who elect the board of directors and may receive dividends from divisible surplus.
- Owned by policyholders.
- Dividends are a return of unused premium.
- Non-taxable dividends to policyholders.
Memory trick: Stock for profit, Mutual for us.