Tennessee Insurance Practice Exam

When a policy pays dividends to its policyholders, it is classified as what type of policy?

1. Non-participating

2. Term policy

3. Participating

4. Whole life policy

The correct answer is: Participating

A policy that pays dividends to its policyholders is classified as a participating policy. This designation refers to the fact that policyholders have a stake in the company's profits, which are distributed as dividends. These dividends can be used in various ways, such as purchasing additional insurance, reducing premiums, or accumulating interest. Participating policies are typically found in mutual insurance companies, where policyholders are also owners. The company's profits are shared with the policyholders in the form of dividends, reflecting their participation in the financial performance of the insurance company. On the other hand, non-participating policies do not offer dividends and are often issued by stock insurance companies, where policyholders do not have ownership stakes. Term policies provide coverage for a specified term and do not accumulate cash value or dividends, and while whole life policies can be participating, not all whole life policies pay dividends. The key factor that defines a participating policy is the payment of dividends, which aligns directly with the definition of a participating policy.