Which dividend option is used to reduce the next premium payment?

• A. Cash option
• B. Reduction of premium
• C. Nonforfeiture option
• D. Paid-up additions

Answer: (B)

Dividends from a participating policy can be allocated in several ways, and the one that directly lowers the policyholder’s next payment is to apply the dividend toward reducing the next premium due. This means the amount of the upcoming premium is decreased by the dividend amount, making the next payment lighter without altering the death benefit or cash value immediately.

For example, if the next premium is 300 and the declared dividend is 50, the premium due would be 250. Any excess beyond the premium, depending on the contract, may be paid in cash or left to accumulate.

The other options do different things: a cash option would pay the dividend out as cash to the owner; paid-up additions use the dividend to buy additional paid-up life insurance (increasing death benefit and cash value); and nonforfeiture options are alternatives available if the policyowner stops paying or surrenders the policy and are not about reducing the next premium.