Which statement is true about paid-up dividend options in a life policy?

• A. Dividends may be used to reduce premiums
• B. Dividends may be used to pay up the policy early
• C. Dividends increase the death benefit automatically
• D. Dividends are always paid in cash

Answer: (B)

The concept being tested is how dividends can be applied to a life policy. One option is to use dividends to pay up the policy early. This means the dividends are used to prepay the remaining premiums, so the policy becomes fully paid up and requires no further premium payments. The policy then remains in force as a paid-up policy, with the death benefit in effect as defined by that paid-up status. Other dividend options exist (such as taking cash, reducing the next premium, accumulating interest, or purchasing paid-up additions) but paying up the policy early is the specific choice described in this statement.