PSI Ohio Insurance Practice Exam

Which of the following describes a non-participating policy?

1. The policyholder receives dividends from the insurer.

2. The policyholder does not receive dividends from the insurer.

3. The policy provides variable death benefits.

4. The premiums are subject to change based on market conditions.

The correct answer is: The policyholder does not receive dividends from the insurer.

A non-participating policy is characterized by the policyholder not receiving dividends from the insurer. This means that the policy is issued by an insurer that does not allow policyholders to share in the company's surplus earnings, which is in contrast to participating policies where dividends are paid out based on the insurer's financial performance. Typically, participating policies are associated with mutual insurance companies, which are owned by policyholders and may distribute profits in the form of dividends. Non-participating policies, on the other hand, are more commonly found with stock companies, where the policyholders are not entitled to such distributions. This structure can have implications for the overall cost and benefits associated with the policy, often leading to lower premiums initially compared to participating policies since there is no expectation of dividends. The other choices address characteristics that do not define non-participating policies. For instance, variable death benefits and changing premiums are related to specific types of life insurance products—such as variable life insurance—rather than the distinction between participating and non-participating policies. Therefore, the key distinction that defines a non-participating policy is indeed the absence of dividend payments to the policyholder.