PSI Ohio Insurance Practice Exam

What is the primary difference between participating and non-participating policies?

1. Participating policies offer higher death benefits.

2. Non-participating policies are more flexible.

3. Participating policies pay dividends; non-participating do not.

4. Non-participating policies have lower premiums.

The correct answer is: Participating policies pay dividends; non-participating do not.

Participating policies are characterized by their feature of paying dividends to policyholders, which is rooted in the mutual insurance company model. These policies are typically issued by mutual insurance companies that operate for the benefit of their policyholders. Because of this structure, when the insurance company performs well, policyholders can receive dividends as a return of excess premium costs. On the other hand, non-participating policies do not pay dividends. These policies are generally issued by stock insurance companies that operate to generate profits for shareholders. Since there is no participation in the company's profits in a non-participating policy, policyholders do not receive any dividends. Since the distinction revolves around the payment of dividends, the key difference centers on how participating policies share their surplus with policyholders, providing an additional benefit that non-participating policies do not offer. This makes the payment of dividends a significant aspect of participating policies, highlighting their unique position in the insurance landscape.