Which type of accounting refers to the dividend option in which the policy owner uses dividends to purchase additional insurance coverage?

• A. Cash surrender accounting
• B. Paid-up additions
• C. Premium reduction
• D. Participating accounting

Answer: (B)

Verified step by step guidance

1. Understand the context of the question: The problem is asking about a specific type of accounting or financial mechanism related to dividends in insurance policies.
2. Clarify the term 'dividends' in this context: In insurance, dividends are a return of excess premium paid by policyholders of participating policies. These dividends can be used in various ways, such as cash withdrawal, premium reduction, or purchasing additional insurance coverage.
3. Focus on the option 'Paid-up additions': This refers to using dividends to purchase additional amounts of insurance coverage without requiring further premium payments. These additions are fully paid-up and increase the policy's death benefit and cash value.
4. Eliminate other options: 'Cash surrender accounting' refers to the process of surrendering a policy for its cash value, which is unrelated to using dividends. 'Premium reduction' involves using dividends to lower future premium payments, and 'Participating accounting' refers to the accounting for policies that pay dividends, not the specific use of dividends.
5. Conclude that the correct answer is 'Paid-up additions,' as it directly describes the use of dividends to purchase additional insurance coverage.