Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A client owns a participating whole life insurance policy and receives an annual dividend. Which of the following dividend options would result in the highest guaranteed cash value growth for the policy?
- AAccumulate at interest
- BReduction of premium
- CPaid-up additions
- DCash payment
Show answer & explanationAnswer & explanation
Correct answer: C. Paid-up additions
Using dividends to purchase paid-up additions buys small, single-premium whole life policies. These additions immediately increase the death benefit and begin accumulating their own cash value, thereby accelerating the overall cash value growth of the original policy.
Why the other options are wrong
- A. Accumulating at interest allows the dividends to earn interest, but this growth is typically less significant for cash value than the compounding effect of paid-up additions, which are themselves small whole life policies.
- B. Reducing the premium saves out-of-pocket costs but does not directly increase the policy's cash value growth.
- D. Receiving cash does not grow the policy's cash value; it's a direct payment.
Paid-Up Additions Dividend Option
A life insurance dividend option where dividends are used to purchase small, single-premium whole life policies that add to the existing policy's death benefit and cash value.
- Increases death benefit without further proof of insurability
- Increases policy's cash value faster
- Each addition is a mini, fully paid-up whole life policy
Memory trick: Dividends are gifts, how you use them shapes your policy's future.