Texas General Lines — Life, Accident, Health and HMOLife InsuranceMedium
A life insurance policyowner has chosen the 'Paid-Up Additions' dividend option. Which of the following statements accurately describes this option?
- AThe dividends are used to reduce the next premium payment due.
- BThe dividends are held by the insurer and earn interest, which is taxable.
- CThe dividends are used to purchase a single premium whole life policy for an additional amount of insurance.
- DThe dividends are paid out directly to the policyowner in cash.
Show answer & explanationAnswer & explanation
Correct answer: C. The dividends are used to purchase a single premium whole life policy for an additional amount of insurance.
The Paid-Up Additions dividend option uses the policy's dividends to purchase small, single-premium Whole Life policies that add to the face amount of the original policy. These additions also generate their own cash value and dividends.
Why the other options are wrong
- A. This describes the 'Reduction of Premium' dividend option.
- B. This describes the 'Accumulation at Interest' dividend option.
- D. This describes the 'Cash Payment' dividend option.
Paid-Up Additions Dividend Option
A life insurance dividend option where dividends are used to purchase small, single-premium, fully paid-up whole life policies that increase the death benefit and cash value of the original policy.
- Increases both death benefit and cash value.
- Each addition is a mini single-premium whole life policy.
- Dividends used this way are generally not taxable until the policy is surrendered or matures, and only if they exceed premiums paid.
- Can be chosen to accelerate policy growth.
Memory trick: Dividends are gifts, how they're used determines their shifts!