South Carolina Life Insurance Practice Exam

An insured has a life insurance policy with a participating company and chooses to use dividends to increase death benefits. What is this dividend option called?

1. Paid-Up Additions

2. Accidental Death Benefit

3. Dividend Accumulation Option

4. Reduction of Premium

The correct answer is: Paid-Up Additions

When an insured chooses to use dividends to increase death benefits in a life insurance policy with a participating company, this option is referred to as Paid-Up Additions. This option allows the insured to purchase additional amounts of paid-up insurance coverage through the use of dividends, which enhances the overall death benefit of the policy. Paid-Up Additions are effective because they not only increase the death benefit but also contribute to building cash value, which can grow over time and provide the policyholder with additional financial resources if needed. This strategy is particularly beneficial as it utilizes dividends to effectively and efficiently increase the policy's value without additional out-of-pocket expenses. In contrast, other options such as Accidental Death Benefit are separate riders that provide additional coverage in case of accidental death, not related to the dividends. The Dividend Accumulation Option involves leaving dividends to accumulate interest instead of allocating them toward increasing death benefits. Reduction of Premium, on the other hand, refers to using dividends to offset future premiums rather than increasing coverage. Therefore, the selection of Paid-Up Additions aligns perfectly with the scenario of enhancing the death benefit using dividends from a participating life insurance policy.