New Jersey Life and Health State Practice Exam

What kind of life insurance policy issued by a mutual insurer provides a return of divisible surplus?

1. Term life insurance policy

2. Whole life insurance policy

3. Participating life insurance policy

4. Non-participating life insurance policy

The correct answer is: Participating life insurance policy

A participating life insurance policy is designed to provide policyholders with the opportunity to receive dividends, which represent a return of the divisible surplus earned by the insurer. This type of policy is typically offered by mutual insurers, which means that the policyholders are also considered the owners of the company. As a result, they are entitled to share in the company's profits through these dividends. Dividends from a participating policy may be used in various ways, such as taking them as cash, using them to reduce premiums, applying them as paid-up additions to increase the policy's value, or purchasing life insurance coverage. The ability to receive dividends is a key feature distinguishing participating policies from non-participating policies, which do not provide such benefits. In contrast, term life insurance policies do not build cash value or provide dividends, as they offer pure life coverage for a specified term without an investment component. Whole life insurance also offers a cash value component, but whether it participates in dividends depends on the specific type of whole life policy. Non-participating policies, on the other hand, do not share in the insurer's surplus, hence, they do not offer dividends to policyholders. Thus, participating life insurance policies stand out as the correct answer for this question