Tennessee Insurance Practice Exam

Which statement best describes a participating insurance policy?

1. Policyholders receive lower premiums.

2. Policy owners are entitled to receive dividends.

3. It covers only specified risks.

4. It is a temporary coverage plan.

The correct answer is: Policy owners are entitled to receive dividends.

A participating insurance policy is designed to allow policy owners to share in the profits of the insurance company. This is achieved through the payment of dividends to policyholders, which are often based on the company's financial performance. Being a participating policy means that policyholders have a vested interest in the profitability of the insurer, as these dividends can serve as a return on premiums paid. In contrast, lower premiums are typically associated with non-participating policies, where policyholders do not share in the insurer's profits and thus pay a fixed premium rate. While a policy might specify what risks it covers, this characteristic alone does not define a participating policy, as many insurance products cover specified risks without having dividend distributions. Similarly, temporary coverage plans focus on providing limited-time insurance solutions, which is distinctly different from the nature of participating policies that are often permanent or long-term in structure.