Colorado Life Producer License Practice Test

Which of the following dividend options results in an increase in the death benefit?

1. Cash payments

2. Paid up additions

3. Accumulation of interest

4. Reduction of premiums

The correct answer is: Paid up additions

The option that results in an increase in the death benefit is paid-up additions. This method allows policyholders to use their dividends to purchase additional insurance coverage. Each paid-up addition is a small whole life policy that essentially increases the overall death benefit of the original policy. When dividends are used for paid-up additions, the added coverage is typically paid for with the dividends themselves, thus enhancing both the policy's cash value and its death benefit. Over time, this can significantly bolster the financial security provided to beneficiaries. Cash payments, accumulation of interest, and reduction of premiums do not directly increase the death benefit. Cash payments provide immediate liquidity but do not enhance coverage. Accumulating interest adds value to the cash component of the policy but does not affect the death benefit. Reducing premiums allows for lower costs but similarly does not alter the amount of coverage provided upon death. Therefore, utilizing dividends for paid-up additions is a strategic choice for those seeking to enhance their life insurance protection over time.