PSI Life Exam Practice Test 2025 - Free Life Insurance Exam Questions and Study Guide

Policy dividends in the context of life insurance refer to a portion of the insurer's profit that is returned to policyholders. This typically occurs with participating whole life insurance policies, where policyholders may receive dividends based on the insurer's financial performance and surplus earnings. These dividends are not guaranteed and depend on various factors, such as investment returns and mortality costs.

When policyholders receive these dividends, they can choose to take them as cash, apply them toward premium payments, or even use them to purchase additional coverage. The notion that these dividends represent a share of profits incentivizes policyholders to engage with their policies actively, encouraging a long-term relationship with the insurance company.

In contrast, other choices mention bonuses for agents, tax deductions, and discounts on future policies, which do not accurately reflect what policy dividends represent in life insurance.