Which statement correctly describes a nonparticipating life insurance policy?
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
A nonparticipating policy does not pay dividends to the policyowner. Dividends, which reflect favorable mortality, expense, and investment experience, are a feature of participating policies typically issued by mutual insurers. Because a nonparticipating policy's premium is set with the assumption that no dividends will be returned, its cost is generally more predictable, and the policyowner has no share in the insurer's surplus. Nonparticipating policies are commonly issued by stock insurers, although any insurer may offer them. The absence of dividends means the policyowner neither benefits from nor shares in the insurer's favorable experience.
Why the other options are wrong
- Nonparticipating policies are usually issued by stock insurers, while mutual insurers typically issue participating policies. The statement reverses the usual relationship between the two insurers. Accordingly, this option is not correct because it does not match the specific rule or product that is described in the question.
- Nonparticipating premiums are not automatically lower; they are simply not adjusted by dividends. Whether the net cost is lower depends on the insurer's experience and dividend performance. This option therefore does not match the facts presented in the question and is not the correct answer to select.
- Nonparticipating policies can be whole life contracts that build cash value exactly like participating whole life; dividends, not cash value, are absent from these contracts. This answer describes a different situation from the one in the question and is therefore incorrect under the facts given here.
Memory hook
A nonparticipating policy means no dividends, so the cost stays predictable.