Under the one-year term dividend option, the policy dividend is used to:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The one-year term dividend option uses the dividend to buy a one-year term insurance benefit equal to the policy's cash value, boosting the death benefit during the year while the permanent coverage continues unchanged. It is sometimes called the fifth dividend option. This maximizes the total coverage for the current year at a relatively low cost because term insurance is inexpensive. The option must be renewed each year with a new dividend. It provides extra protection during the years when a family's insurance needs are greatest without requiring a higher premium outlay.
Why the other options are wrong
- Purchasing additional paid-up whole life coverage describes the paid-up additions option, which adds permanent coverage that cannot lapse.
- Using the dividend to offset the premium describes the reduced premium option, which lowers the next payment rather than adding coverage.
- Holding the dividends in the policy to earn interest describes the accumulation at interest option, which does not increase the death benefit.
Memory hook
One-year term option = dividends buy a year of extra death coverage equal to your cash value.