What is a participating policy?

• A. A policy issued by a mutual or stock company with no dividends.
• B. A policy that excludes surplus profits.
• C. A policy that distributes the insurer's surplus as policy dividends to policyowners.
• D. A policy that never pays dividends.

Answer: (C)

A participating policy means the policyowner can receive a share of the insurer's profits as dividends. These policies are issued by mutual (or participating) companies, and the dividends come from the insurer’s surplus. Dividends are not guaranteed and depend on the company’s financial performance; they can be used to reduce premiums, purchase additional coverage, or be paid in cash. This contrasts with nonparticipating policies, which do not pay dividends. So, the defining idea is that surplus is distributed to policyowners as dividends.