Dividends can be used to purchase paid-up additions.

• A. Dividends can be used to purchase paid-up additions
• B. Dividends are guaranteed cash payments
• C. Dividends reduce policy's cash value
• D. Dividends are taxed as ordinary income to the insured

Answer: (A)

Dividends from participating whole life policies are distributions of the insurer’s surplus that policyholders can apply in several ways, one of which is to purchase paid-up additions. A paid-up addition is a small, fully paid extra policy added to your main policy. Using dividends to buy PUAs increases both the death benefit and the policy’s cash value without additional out-of-pocket premium. This option is a standard feature of participating policies and reflects how the insurer shares profits with policyowners.

Dividends aren’t guaranteed cash payments; they depend on the company’s performance and may be taken in cash, left to accumulate, or used for other options. They don’t reduce the policy’s cash value; PUAs actually boost it. And dividends aren’t typically taxed as ordinary income to the insured, being generally tax-free up to the basis of premiums paid.