Life & Health Insurance Practice Exam

What term is used to refer to companies that allow policyowners to participate in dividends?

1. Stock companies

2. Mutual companies

3. Nonprofit organizations

4. Commercial companies

The correct answer is: Mutual companies

Mutual companies are those that allow policyowners to participate in dividends. This is a key characteristic of mutual insurance companies; they are owned by their policyholders, and any profits generated by the company are typically distributed back to those policyholders in the form of dividends. These dividends are considered a return on premium payments and are not guaranteed, but they represent a potential benefit of belonging to a mutual company. In contrast, stock companies are owned by shareholders, and profits are distributed as stock dividends to shareholders, not to policyholders. Nonprofit organizations generally do not operate like insurance companies, as their primary focus is on serving a social or public benefit rather than generating profit for policyholders. Commercial companies might exist in various forms, including mutual and stock companies, but they do not specifically denote a structure where policyowners receive dividends. Therefore, mutual companies are the distinct type of insurance entities where policyholders can share in the financial results through dividends.