Colorado Life Producer License Practice Test

The paid-up addition option uses the dividend as?

1. To increase the face amount of the policy

2. To purchase a smaller amount of the same type of insurance as the original policy

3. To provide cash value access

4. To pay off the policy loan

The correct answer is: To purchase a smaller amount of the same type of insurance as the original policy

The paid-up addition option utilizes the dividends to purchase a smaller amount of the same type of insurance as the original policy. This feature allows policyholders to enhance their life insurance coverage without the need for additional underwriting or medical exams. When dividends are calculated for whole life or participating policies, they can be used in various ways, and one such method is to buy paid-up additions. These additions increase the total death benefit of the policy and also accumulate additional cash value, contributing to the overall growth of the policy. By choosing this option, policyholders essentially increase their insurance protection while still benefiting from policy dividends. This choice is particularly advantageous because it provides an automatic mechanism to incrementally increase the policy's value and death benefit over time, enhancing the financial security provided by the life insurance policy without requiring out-of-pocket expenses from the policyholder.