Which company is owned by policyowners and issues participating policies with dividends that are a return of excess premiums and are nontaxable?

Which company is owned by policyowners and issues participating policies with dividends that are a return of excess premiums and are nontaxable?

• A. Reinsurer
• B. Nonparticipating insurer
• C. Mutual company
• D. Stock company

Answer: (C)

The main idea is ownership structure: a company owned by policyowners can issue participating policies that pay dividends. A mutual life insurer fits this because it is owned by those who hold the policies, and participating policies can distribute dividends to policyowners. These dividends are considered a return of excess premiums and are generally nontaxable to the policyowner to the extent they represent a return of premium. Reinsurers aren’t owned by policyowners and don’t issue participating policies to individuals. Nonparticipating insurers don’t pay policyowner dividends. Stock companies are owned by shareholders, not policyowners, and their dividends go to stockholders and aren’t the same kind of policyowner dividends.

The main idea is ownership structure: a company owned by policyowners can issue participating policies that pay dividends. A mutual life insurer fits this because it is owned by those who hold the policies, and participating policies can distribute dividends to policyowners. These dividends are considered a return of excess premiums and are generally nontaxable to the policyowner to the extent they represent a return of premium. Reinsurers aren’t owned by policyowners and don’t issue participating policies to individuals. Nonparticipating insurers don’t pay policyowner dividends. Stock companies are owned by shareholders, not policyowners, and their dividends go to stockholders and aren’t the same kind of policyowner dividends.