New Jersey Life Producer Practice Exam

What is a key characteristic of a mutual insurance company?

1. It allows outside investors

2. It is owned by shareholders

3. It is owned by its policyholders

4. It operates under government regulations exclusively

The correct answer is: It is owned by its policyholders

A mutual insurance company is fundamentally characterized by its ownership structure. It is owned by its policyholders, meaning that the individuals or entities who purchase insurance policies from the company also hold an ownership stake in it. This structure is designed to align the interests of the policyholders with the company's operations, as any profits or surplus generated are typically returned to the policyholders in the form of dividends or reduced future premiums rather than distributed to shareholders as in a stock insurance company. This ownership model ensures that the company prioritizes the needs and interests of its policyholders over external investors or shareholders. The focus is on providing benefits to the members rather than generating profits for outside investors, which is a defining aspect of mutual companies.