Which statement about a nonparticipating life insurance policy is correct?

Why A is correct

A nonparticipating (non-par) policy does not pay dividends; the premium is based on more conservative assumptions and the policyowner does not share in the insurer's divisible surplus. Because there are no dividends to fluctuate, non-par policies often carry lower base premiums than participating policies, which charge higher premiums and return a portion of surplus to policyowners as dividends. Non-par policyowners are not shareholders, and the absence of dividend participation does not depend on the company's actual profit in a given year.

Why the other options are wrong

• B) Dividends are characteristic of participating (par) policies, not nonparticipating policies, and dividends are never guaranteed.
• C) Policyowners are not shareholders; shareholders own a stock insurer, while policyowners simply hold insurance contracts.
• D) Premiums are set in advance based on pricing assumptions; they do not adjust up or down with the company's annual profits.

Memory hook

Non-par = no surplus sharing, no dividends, typically leaner premiums. Par = share the pie.

Why A is correct

A nonparticipating policy uses guaranteed, fixed premium and benefit assumptions, so the insurer keeps any surplus that results from favorable mortality, expense, or investment experience. The policyowner receives no dividends. Nonparticipating policies are typically issued by stock companies, and their premiums cannot be reduced by dividends. Because the insurer assumes the risk that actual experience will be better than assumed, the policyowner is not entitled to share in the resulting surplus.

Why the other options are wrong

• B) Paying annual dividends to policyowners is the defining feature of a participating policy, not a nonparticipating one.
• C) Policyowners of a nonparticipating stock-company policy are customers, not shareholders; shareholders own the stock company.
• D) The premium of a nonparticipating whole life policy is level for life, not decreasing with age.

Memory hook

Nonparticipating = no dividend checks. Any surplus stays with the company; the contract says so up front.

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.