California Life-Only & Accident and Health AgentLife InsuranceEasy
A life insurance agent is explaining the difference between participating and non-participating policies to a client. Which of the following statements accurately describes a characteristic of participating life insurance policies?
- AThey do not pay dividends to policyholders.
- BThey offer lower initial premiums compared to non-participating policies.
- CThey are issued by mutual insurance companies.
- DTheir cash values grow at a fixed, guaranteed rate.
Show answer & explanationAnswer & explanation
Correct answer: C. They are issued by mutual insurance companies.
Participating policies are typically issued by mutual insurance companies. These companies are owned by their policyholders, who receive dividends as a share of the company's divisible surplus.
Why the other options are wrong
- A. This describes non-participating policies. Participating policies are characterized by paying dividends to policyholders.
- B. Participating policies often have higher initial premiums because they are designed to pay dividends.
- D. While cash values grow, the dividend component is not fixed or guaranteed, making the overall growth less predictable than a purely guaranteed rate.
Participating Life Insurance
A type of life insurance policy, typically issued by mutual insurance companies, that allows policyholders to share in the company's divisible surplus through dividend payments.
- Issued by mutual insurance companies.
- Policyholders share in company profits (divisible surplus).
- Pay dividends to policyholders.
- Initial premiums are often higher than non-participating policies.
Memory trick: Participating: Mutual owners, share the profits, get dividends.