Certified Financial Consultant (CFC) Practice Exam

In which type of insurance does the insurer participate in the profits and losses of the policyholder?

1. Term insurance

2. Participating insurance

3. Non-participating insurance

4. Universal insurance

The correct answer is: Participating insurance

Participating insurance is designed to allow policyholders to share in the profits and losses of the insurance company. This type of policy typically provides dividends to policyholders, which can be based on the company's performance, investment returns, and underwriting success. Because policyholders have a vested interest in the insurer's financial health, they can benefit from these dividends over the life of the policy. In contrast, term insurance provides coverage for a specified term and does not accumulate cash value or offer dividends. Non-participating insurance, by definition, does not allow policyholders to receive any portion of the insurer's profits, which means they do not benefit from any dividends. Universal insurance is a flexible premium, adjustable benefit policy, but it does not involve profit sharing in the same way participatory policies do. Thus, the unique feature of participating insurance is its alignment with the policyholder's interest in the insurer's overall financial performance.