Florida 2-15 Life, Health and Variable Annuity AgentGeneral Knowledge of Life InsuranceMedium
A client owns a participating whole life insurance policy and wants to use their annual dividends to increase the policy's death benefit and cash value. Which dividend option should they choose?
- ACash payment
- BAccumulate at interest
- CPaid-up additions
- DReduction of premium
Show answer & explanationAnswer & explanation
Correct answer: C. Paid-up additions
The Paid-Up Additions dividend option uses the dividend to purchase small, single-premium whole life policies. Each paid-up addition has its own cash value and death benefit, thereby increasing the overall policy's death benefit and accelerating cash value growth.
Why the other options are wrong
- A. Cash payment means the dividend is simply received by the policyowner and does not affect the policy's death benefit or cash value.
- B. Accumulate at interest means the dividend is held by the insurer and earns interest, increasing cash value but not directly the death benefit.
- D. Reduction of premium uses the dividend to offset the next premium payment, which does not directly increase the death benefit or cash value.
Paid-Up Additions Dividend Option
An option where life insurance policy dividends are used to purchase small, single-premium whole life policies (paid-up additions), which increase both the policy's death benefit and cash value.
- Uses dividends to buy more insurance
- Increases death benefit
- Increases cash value
- Each addition is fully paid for
Memory trick: Additions boost, cash is quick, interest grows, premium shrinks.