Texas Life Agent Practice Exam

What is the primary purpose of a Life insurance policy dividend?

1. To increase the death benefit

2. To provide policy loans

3. To reduce premiums

4. To provide a cash return to the policyholder

The correct answer is: To provide a cash return to the policyholder

The primary purpose of a life insurance policy dividend is to provide a cash return to the policyholder. Dividends are typically associated with participating policies issued by mutual insurance companies. These dividends represent a share of the company's profits and are paid to the policyholders based on the insurer's financial performance and underwriting results. When a policyholder receives dividends, they often have several options for how to utilize them, such as receiving the dividends in cash, applying them towards the premium, purchasing additional coverage, or leaving them to accumulate interest. This flexibility highlights the value of dividends not just as a return but as a way to enhance the overall benefits of the life insurance policy for the insured. While dividends can indeed serve purposes like reducing premiums or purchasing additional benefits, the main function they serve is to return a portion of the profits to policyholders, reinforcing their ownership and participation in the insurance company.