Which of the following allows policyholders to receive dividends based on the insurer's profits?

A participating policy allows policyholders to receive dividends because it is structured to share the profits of the insurance company with its policyholders. This means that policyholders have a stake in the insurer's overall performance, and if the company performs well financially, dividends may be distributed.

Dividends from participating policies can be used in various ways, such as reducing future premiums, purchasing additional insurance, or being taken as cash. This feature provides an incentive for policyholders to choose participating policies, as they can benefit financially from the insurer's success.

In contrast, non-participating policies do not provide dividends; they have a fixed premium and guaranteed benefits without any profit-sharing. Whole life policies can be participating or non-participating, but the key feature is that not all whole life policies allow for dividends. Term policies, on the other hand, are purely for a specified period and do not offer dividends or cash values. Hence, a participating policy is distinct in its ability to reward policyholders with dividends based on the insurer's profits.