Maryland Life and Health Insurance License Practice Exam

Which dividend option allows a policyowner to use dividends to pay premiums?

1. Cash option

2. Reduction of premium dividend option

3. Paid-up additions

4. Accumulation at interest

The correct answer is: Reduction of premium dividend option

The reduction of premium dividend option allows policyowners to utilize their policy dividends to offset the cost of their premiums. This option is particularly advantageous as it reduces the amount of out-of-pocket expense for the policyowner, allowing them to keep their policy in force without the need for additional cash payments. By selecting this option, the dividends are applied directly to the next premium due, effectively lowering the financial burden on the policyowner. In contrast, the cash option provides the policyowner with actual cash payments from the insurer, which does not contribute directly to premium payments. Paid-up additions involve the use of dividends to purchase additional insurance coverage rather than paying premiums. Accumulation at interest means that dividends are allowed to grow in an interest-bearing account, but they do not directly affect premium payments. The reduction of premium option is specifically designed to make premium payments more manageable, making it the most appropriate choice for the question asked.