What type of life insurance policy allows policyholders to receive dividends based on the insurer's performance?

Participating life insurance policies are designed to allow policyholders to receive dividends that are based on the insurer's financial performance, such as surplus earnings. These dividends are a share of the profits generated by the insurance company and can be used in various ways, including taking them as cash, using them to reduce premiums, or purchasing additional coverage.

Participating policies are often whole life insurance policies, which means they provide a death benefit along with a cash value that grows over time. The performance of the insurer, affected by factors such as the investment returns and mortality rates, ultimately determines the amount of dividends paid to policyholders.

In contrast, non-participating life insurance policies do not pay dividends; they offer fixed benefits and premiums without the potential for additional earnings based on the insurer's performance. Variable life insurance allows the policyholder to invest the cash value in a variety of investment options, but it does not provide dividends. Limited-pay life insurance refers to policies where premiums are paid for a limited time while the coverage lasts for the lifetime of the insured, but again, it does not involve the distribution of dividends. Thus, participating life insurance is uniquely positioned to provide dividends, making it the correct choice in this context.