Insurance Broker Certification Practice Exam

What characterizes a participating policy in the insurance industry?

1. A policy that pays dividends

2. A non-renewable insurance policy

3. A policy requiring minimum premiums

4. A policy exclusively for corporate clients

The correct answer is: A policy that pays dividends

A participating policy is primarily characterized by its potential to pay dividends to the policyholders. This type of life insurance policy is issued by mutual insurance companies, wherein the policyholders are considered partial owners of the company. Because of this ownership structure, they have a right to receive a share of the company's surplus in the form of dividends. These dividends can be taken as cash, used to reduce premiums, or left to accumulate interest. This feature of paying dividends is significant because it allows policyholders to benefit from the financial performance of the insurance company. It also distinguishes participating policies from non-participating policies, which do not offer dividends. Understanding this aspect is crucial for insurance brokers, as it affects how they can tailor their recommendations to meet a client's financial goals and needs.