Under the paid-up additions dividend option, each year's dividend is used to:

Why A is correct

The paid-up additions dividend option uses the dividend to purchase small amounts of fully paid-up whole life insurance. Each addition has its own cash value and death benefit, so over time both the total death benefit and the cash value of the policy increase. Because the additions are paid up, no further premiums are required for them. This option is a popular way to build the policy's value without medical evidence, and it can be an effective tool for increasing estate value or funding future needs.

Why the other options are wrong

• Reducing the next premium is the reduced premium option; paid-up additions focus on increasing coverage rather than lowering the current cost. Accordingly, this option is not correct because it does not match the specific rule or product that is described in the question.
• Buying one-year term insurance equal to the policy's cash value describes the one-year term dividend option, not the paid-up additions option. This option therefore does not match the facts presented in the question and is not the correct answer to select.
• Accumulating funds for the beneficiary is closer to the accumulation-at-interest option; paid-up additions instead purchase permanent insurance increments. This answer describes a different situation from the one in the question and is therefore incorrect under the facts given here.

Memory hook

Paid-up additions mean each dividend buys tiny whole life policies.