Which of the following is a standard dividend option available to the owner of a participating life insurance policy?
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The standard dividend options for a participating policy are: cash payment, application to reduce the premium, accumulation at interest, paid-up additions (additional paid-up insurance purchased with the dividend), and one-year term insurance. Paid-up additions increase both the death benefit and cash value, making it a popular way to compound coverage. These are the policyowner's choices for using dividends, which are not guaranteed and are typically declared by the insurer's board when surplus is favorable. The other listed items are distinct policy features, not dividend disposition choices.
Why the other options are wrong
- B) Extended term insurance is a nonforfeiture option available when a policy lapses or is surrendered. It is not a dividend option, which concerns how the policyowner uses declared dividends. The correct answer is paid-up additions, one of the five standard dividend options.
- C) A policy loan is a borrowing against the cash value of the policy. It is not a way to apply a dividend declared by the insurer on a participating policy. The correct answer is paid-up additions, one of the five standard dividend options.
- D) The automatic premium loan (APL) provision uses cash value to pay a missed premium automatically. It is a premium-payment mechanism, not a dividend option. The correct answer is paid-up additions, one of the five standard dividend options.
Memory hook
Dividend options, five doors: cash, reduce premium, accumulate, paid-up additions, one-year term.