Certified Financial Consultant (CFC) Practice Exam

When can earned surplus be returned to policyholders?

1. Only at the end of the fiscal year

2. When profits exceed expected returns

3. Whenever it exists and is not needed for other expenses

4. At the discretion of the board of directors

The correct answer is: Whenever it exists and is not needed for other expenses

The return of earned surplus to policyholders is generally permitted whenever the surplus exists and is not required for other operational or financial commitments. This means that if the company has generated surplus funds from its operations—profits that have not been allocated to reserves or other liabilities—it can distribute this excess to those who hold policies, assuming there are no immediate needs for that surplus within the organization. Understanding this context is important because earned surplus signifies the accumulated profits over time, which can be distributed to policyholders as a form of dividends or other benefits. It's crucial to ensure that the company remains financially stable and can meet its obligations while also rewarding its policyholders. Thus, the timing of distributions can be flexible, prioritizing the needs of the organization and the financial health of the insurance provider. The other options limit the circumstances under which earned surplus can be returned, which is not in line with the more flexible approach allowed in the industry. Distributions are not strictly tied to the fiscal year, profit metrics, or solely the discretion of the board, but rather depend on the availability of surplus and the company's ongoing financial needs.