Dividend Options

Mutual life insurance policies and some policies sold by stock insurers frequently contain dividend options. If the policy pays dividends, it is known as a participating policy. Both stock and mutual insurers issue participating policies, which give policyholders the right to share in the divisible surplus of the insurer. The dividend represents largely a refund of part of the gross premium if the insurer has favorable experience with respect to mortality, interest, and expenses. In contrast, a policy that does not pay dividends is known as a nonparticipating policy.

Policy dividends are derived from three principal sources: (1) a favorable difference between expected and actual mortality experience, (2) higher than anticipated ...

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