Which statement about a nonparticipating life insurance policy is correct?
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Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
A nonparticipating policy pays no dividends; any excess earnings belong to the insurer rather than being returned to policyowners. Because no dividends are anticipated, nonparticipating premiums are typically lower than the premiums of a comparable participating policy, which includes a loading for the dividend the insurer expects to pay. Both mutual and stock companies can issue nonparticipating policies, while participating policies are most commonly associated with mutual insurers. The distinction turns on dividend participation, not on the company's ownership structure or its profit status.
Why the other options are wrong
- A) By definition, nonparticipating policies do not distribute dividends; policies that pay dividends to policyowners are called participating policies.
- C) Mutual insurers commonly issue participating policies, but nonparticipating policies are sold by stock insurers and by mutual insurers alike.
- D) The reverse is true: nonparticipating premiums are usually lower because they do not include a loading for anticipated dividend payments.
Memory hook
Nonparticipating = no slice of the profit pie. A lower premium is the trade-off.