Paid-up Additions

The dividend option that uses dividends to buy small amounts of additional permanent coverage is:

1. A.Accumulation at interestLeaves the dividend on deposit with the insurer to earn interest. That grows a cash fund rather than buying coverage, and the interest credited is currently taxable to the owner.
2. B.Paid-up additionsCorrect - dividends buy paid-up coverage.
3. C.Reduction of premiumApplies the dividend against the next premium due, which lowers the owner's out-of-pocket cost. It reduces what the owner pays rather than adding any death benefit.
4. D.Cash paymentSends the dividend to the owner as a check. The money leaves the contract entirely, so no additional insurance is purchased with it.

Why: Paid-up additions use dividends to purchase additional paid-up insurance.

Dividend options on a participating whole life policy include:

1. A.Cash, premium reduction, accumulation, paid-up additions, one-year termCorrect - the standard dividend options.
2. B.None - par policies pay no dividendsInverts the definition. Participating means the policy participates in divisible surplus; the nonparticipating policy is the one that pays no dividends.
3. C.Only surrenderSurrender terminates the contract and belongs to the nonforfeiture provisions, not the dividend menu. Dividend options are elections the owner makes while the policy stays in force.
4. D.Only a cash payoutCash is a real option, so the mistake is the word only. Insurers routinely offer premium reduction, accumulation at interest, paid-up additions, and one-year term alongside it.

Why: Options include cash, premium reduction, accumulation at interest, paid-up additions, and one-year term.

Amadeo wants to add 150,000 dollars of extra coverage to his participating whole life policy and is choosing between a level term rider and a paid-up additions rider funded with extra premium. What is the key difference?

1. A.The paid-up additions rider costs less per dollar of death benefit, because the additions are paid up immediatelyBeing paid up immediately is exactly why additions cost MORE per dollar of face amount. That is the trade-off for permanence and cash value.
2. B.Both build cash value, but only the paid-up additions rider may be surrendered separatelyTerm riders build no cash value, so there is nothing to surrender.
3. C.The term rider buys pure protection that expires and builds no cash value, while the paid-up additions rider buys fully paid-up whole life that builds cash value, earns dividends and never expiresCorrect. One is temporary protection, the other is permanent coverage plus accumulation.
4. D.The term rider builds cash value more quickly because its premium is lowerA lower premium buys less, not more. Term riders have no cash value at all.

Why: A term rider buys pure protection: it is inexpensive per dollar of death benefit, builds no cash value, and expires at the end of its term. A paid-up additions rider buys small blocks of fully paid-up whole life, each of which carries its own guaranteed cash value, earns its own dividends, and never expires. Paid-up additions cost more per dollar of immediate death benefit precisely because they are permanent and funded up front. The clue is the phrase paid-up.

A policy with a 400,000 face amount, 30,000 in paid-up additions, and no loan pays a death benefit of:

1. A.400,000 dollarsOverlooks the paid-up additions. Those are additional insurance already purchased and fully paid for, and they settle alongside the base face amount.
2. B.430,000 dollarsCorrect - face plus paid-up additions.
3. C.370,000 dollarsSubtracts the additions as if they were a debt. Additions enlarge the amount payable; only loans reduce it, and the stem says there is none.
4. D.30,000 dollarsReports the additions alone and drops the base policy from the total. Both pieces are payable.

Why: 400,000 + 30,000 = 430,000 dollars.