What does a participating policy generally provide to its policyholders?

A participating policy is designed to provide policyholders with dividends that are directly linked to the financial performance of the insurance company. These dividends typically arise from the surplus earnings achieved by the insurer after all expenses and claims have been covered. Because participating policies enable policyholders to share in the profitability of the insurer, they can receive these dividends as a form of profit-sharing.

This mechanism encourages a greater sense of ownership among policyholders and is a distinguishing feature of mutual insurance companies, which often issue participating policies. The financial performance of the insurer can vary, and therefore, dividends are not guaranteed every year, but they do offer potential additional income for policyholders based on the insurer's success.

In contrast to the other options, participating policies do not provide nonrefundable premiums since premiums are paid for coverage rather than as an investment. They also do not guarantee returns on investments, as the focus is more on the performance of the insurance company rather than a direct investment vehicle. Fixed premiums might be a characteristic of some policies, but they do not represent the primary benefit of participating policies.