Texas General Lines — Life, Accident, Health and HMOLife InsuranceEasy
A life insurance policyowner has chosen the 'Paid-Up Additions' dividend option. Which of the following statements BEST describes the effect of this option?
- AThe dividends are used to purchase small, single-premium whole life policies.
- BThe dividends are used to reduce the next premium payment.
- CThe dividends are retained by the insurer and earn interest.
- DThe dividends are paid out to the policyowner in cash.
Show answer & explanationAnswer & explanation
Correct answer: A. The dividends are used to purchase small, single-premium whole life policies.
The Paid-Up Additions dividend option uses dividends to purchase additional small, single-premium whole life policies. These additions increase the death benefit and cash value of the original policy.
Why the other options are wrong
- B. This describes the 'Reduction of Premium' dividend option.
- C. This describes the 'Accumulation at Interest' dividend option.
- D. This describes the 'Cash Dividend' option.
Paid-Up Additions Dividend Option
An option where life insurance policy dividends are used to purchase small, single-premium whole life policies that add to the face amount and cash value of the original policy.
- Increases death benefit.
- Increases cash value.
- No further premiums required for the additions.
Memory trick: Paid-Up Additions: Dividends *add* more *paid-up* insurance.