A dividend in life insurance is best described as what?

• A. A partial return of premium
• B. A guaranteed fixed interest
• C. A loan
• D. A fee

Answer: (A)

Dividends in participating life insurance come from the insurer’s excess profits and represent a partial return of the premiums paid by the policyholder, not a guaranteed interest or a loan. When the company’s experience (mortality, expenses, and investments) is favorable, a portion of the surplus is returned to the policyholder as a dividend. Because these dividends depend on actual experience, they are not guaranteed and can vary from year to year. They can be received in cash, used to reduce premiums, used to purchase paid-up additions, or left to accumulate interest. They are not a loan or a fee—the dividend is basically a share of the profits returned to you.