Colorado Life Producer License Practice Test

Which option allows a policy owner to use dividends to pay for their next premium?

1. Paid-up additions

2. Cash payment option

3. Reduction of premium

4. Accumulation of interest

The correct answer is: Reduction of premium

The option that allows a policy owner to use dividends to pay for their next premium is known as the reduction of premium. This method enables policyholders to apply the dividends they receive from their life insurance policy toward the payment of their next premium, effectively reducing the amount of cash they need to pay out-of-pocket. This approach is beneficial for policyholders who prefer to maintain their policy without incurring additional costs. By applying the dividends in this way, they can keep their coverage active while also making efficient use of the benefits provided by their policy. In contrast to this option, other methods may not directly facilitate premium payments. For instance, paid-up additions refer to using dividends to purchase additional insurance without the need for further premium payments, thus increasing the death benefit rather than directly addressing premium costs. The cash payment option allows policyholders to take dividends in cash rather than reinvesting them, which would not cover future premium expenses. Accumulation of interest involves dividends being retained in the policy and accruing interest, which does not provide immediate assistance in paying premiums.