Question

In comparing the differences in cost between two life insurance contracts

dividends cannot be guaranteed and should be disregarded.

nonparticipating policies are always cheaper in the long run.

participating policies are always cheaper in the long run.

none of the above.

Answer 1

Considering all options one by one:

Option A: Dividends cannot be guaranteed and should be disregarded:

This option is not true because certain insurance company guarantee annual payments in the form of bonus and dividends. Even if dividends are not guaranteed, future payments can be estimated based on historical payments done by insurance company. Based on historical data we can estimate the total cost of insurance policy to policy holder. So dividend should not be disregarded while estimating cost of insurance policy.

Option B: Non Participating policies are always cheaper in the long run. This is not true because non participating policies may or may not be cheaper. We can't generalize the statement.

Option C: Participating policies are always cheaper in the long run. This is also not true because participating policies may or may not be cheaper. We can't generalize the statement.

Option D: Non of the above: is the correct option.