When a reduced paid-up nonforfeiture option is chosen in an insurance policy, what happens to the face amount of the policy?

• A. The policy is canceled and all coverage ends.
• B. The face amount remains the same, but premium payments stop.
• C. The face amount increases due to accumulated dividends.
• D. The face amount is reduced and the policy remains in force as paid-up insurance.

Answer: (D)

Verified step by step guidance

1. Understand the concept of a reduced paid-up nonforfeiture option: This option allows the policyholder to stop paying premiums while keeping the policy in force. However, the face amount of the policy is reduced.
2. Clarify the term 'face amount': The face amount refers to the death benefit or the amount payable to beneficiaries upon the insured's death.
3. Analyze the impact of choosing the reduced paid-up option: When this option is selected, the policyholder uses the cash value accumulated in the policy to purchase a smaller amount of paid-up insurance. This means the policy remains active without further premium payments, but the coverage amount is reduced.
4. Compare the reduced paid-up option to other nonforfeiture options: Other options, such as cash surrender or extended term insurance, have different effects on the policy. The reduced paid-up option specifically reduces the face amount while maintaining coverage.
5. Conclude that the correct answer is: 'The face amount is reduced and the policy remains in force as paid-up insurance.' This aligns with the definition and mechanics of the reduced paid-up nonforfeiture option.