California Life and Health Insurance Practice Exam

Who benefits from the option of selecting a dividend in a policy?

1. The insurer

2. The agent

3. The insured

4. The beneficiary

The correct answer is: The insured

In a life insurance policy, dividends are typically paid to policyholders, which means that the insured is the primary beneficiary of this option. Dividends are a return of a portion of the premium that the insurer has collected. When a policy performs better than expected—often due to lower than anticipated claims or better investment performance—the insurer can share those profits with policyholders in the form of dividends. These dividends can be used by the insured in several beneficial ways. For instance, policyholders can choose to receive them as cash payments, apply them to reduce premium payments, use them to purchase additional coverage, or accumulate them with interest. This flexibility allows the insured to customize their benefits according to their financial situation and needs, making the dividend selection a significant advantage for policyholders. The other groups mentioned, such as the insurer, agent, or beneficiary, do not directly benefit from the selection of a dividend in a way that affects the insured's financial decisions or policy outcomes. The insurer is responsible for paying the dividends but does not gain from the policyholder's decision. The agent benefits through commissions, but their compensation is not contingent on dividend selections. The beneficiary, typically the person designated to receive the death benefit, does not benefit from dividends unless specific arrangements or