Which dividend option allows dividends to be used to reduce premium payments?

• A. Accumulate with interest
• B. Reduction of premium
• C. Paid-up additions
• D. One-year term insurance

Answer: (B)

Dividends on a participating policy can be used in several ways, and one option is specifically designed to cut future premium costs. The reduction of premium option takes the dividend and applies it toward the next premium due, effectively lowering the amount the policyowner must pay next time. If the dividend equals the premium, the next premium would be fully paid by the dividend; if it’s smaller, it reduces the upcoming premium by that amount. This is different from options that either leave the dividend with the insurer to accumulate, purchase additional paid-up insurance, or buy extra term insurance for a year. Therefore, using dividends to offset and reduce the upcoming premium is the reduction of premium option.