South Carolina Life Insurance Practice Exam

What is a common feature of participating insurance policies?

1. They offer no dividends

2. They are traditionally less expensive

3. They allow policyholders to receive dividends

4. They must be purchased through an agent

The correct answer is: They allow policyholders to receive dividends

Participating insurance policies are distinct in that they allow policyholders to share in the insurer's profits, which is primarily realized through the payment of dividends. These dividends are typically a portion of the surplus earnings that the insurance company has generated beyond what is required to cover claims and operational costs. This feature incentivizes policyholders to choose participating policies as they can receive additional financial benefits over the life of the policy, enhancing its value beyond just providing death benefit protection. In contrast, non-participating policies do not offer this feature and therefore do not issue dividends. Additionally, participating policies are traditionally not necessarily less expensive; in fact, they might come with higher premiums due to the potential for dividends and other benefits. While it is common for these policies to be purchased through an agent, it is not a requirement specific to participating policies, as they can also be purchased directly in some cases. Thus, the ability to receive dividends is the hallmark feature that sets participating policies apart from non-participating options.