What defines a participating policy?

A participating policy is primarily defined by its ability to pay dividends to policyholders, which are based on the insurer's financial performance. This means that if the insurance company performs well, the policyholders may receive a share of the profits in the form of dividends, which can be used in various ways such as reducing premium payments, purchasing additional coverage, or taking as cash.

This characteristic of participating policies aligns with mutual insurance companies, where the policyholders are also the owners of the company. Therefore, they have the potential to benefit from the company’s profitability. This dynamic makes participating policies unique compared to non-participating policies, which do not provide dividends regardless of the insurer's financial performance.

In contrast, the other options do not capture the essence of what makes a participating policy distinct. While some policies might offer flexibility in adjusting benefits, restrict changes in coverage, or limit features to just a death benefit, these attributes do not pertain to the concept of participation or the distribution of dividends. Thus, the defining element of a participating policy is its potential for dividend payments tied to the insurer’s success.