State RegulationsTX specificDifficulty 2/5
A Texas consumer is comparing a participating life policy issued by a mutual insurer with a nonparticipating policy issued by a stock insurer. Which statement is correct?
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why B is correct
Under TIC 801.001 and the mutual insurer provisions of TIC 547.001, a mutual insurer's surplus belongs to its policyholders, so the company may distribute it as policy dividends or apply it to reduce premiums; that is exactly what makes a policy participating. In a stock insurer, earnings belong to the shareholders, so its policies are ordinarily nonparticipating and no policy dividends are paid. Practically, an agent must never describe policy dividends as guaranteed — they depend on the company's mortality, interest, and expense experience and on the directors' action each year.
Why the other options are wrong
- A) A stock insurer does accumulate surplus, but that surplus belongs to its shareholders; it does not pay policy dividends to its policyholders as such.
- C) Policy dividends on participating policies are a normal and expected feature of mutual insurance; they are not limited to shareholders.
- D) Policy dividends are neither guaranteed nor uniform across companies; they vary with the insurer's actual experience and are not fixed by statute.
Memory hook
Participating means paid by a mutual — and never guaranteed.