Massachusetts Life Producer Practice Exam

Which of the following accurately describes a participating insurance policy?

1. Policyowners may have limited rights

2. Policyowners may be entitled to receive dividends

3. Policyowners are required to pay higher premiums

4. Policyowners cannot sell their policies

The correct answer is: Policyowners may be entitled to receive dividends

A participating insurance policy is designed to provide policyowners with the opportunity to receive dividends based on the insurance company's surplus earnings. This feature sets participating policies apart from non-participating policies, where policyowners do not receive dividends. The dividends are not guaranteed, but they can provide policyowners with an additional return on their investment or can be used to reduce premiums, purchase additional coverage, or take as cash. The essence of a participating policy is its mutuality and the shared financial success between the insurer and policyholders. This benefit becomes a crucial selling point for such policies, as it aligns the interests of the policyowners with the financial health of the insurance company. In contrast, while it is possible that participating policies may come with slightly higher premiums relative to non-participating policies — owing to the additional cost of potential dividends — this is not a defining feature of participating insurance. The existing guidelines about the rights of policyowners can vary widely between individual policies, and saleability of policies is typically determined by specific state regulations, rather than the participating or non-participating nature of the policy itself. Thus, the most accurate characteristic of a participating policy is the potential for policyowners to be entitled to receive dividends.