Tennessee Insurance Practice Exam

K wants an increasing death benefit on her whole life policy to protect against inflation. Which dividend option should she choose?

1. Cash payment

2. Paid-up additional insurance

3. Enhanced cash value

4. Reduction of premium

The correct answer is: Paid-up additional insurance

Choosing the option for paid-up additional insurance is the most suitable choice for K who is interested in an increasing death benefit to protect against inflation. This option allows policyholders to utilize their dividends to purchase additional whole life insurance. As K's policy accumulates dividends, these additional policies increase both the death benefit and the cash value over time, effectively providing a buffer against inflation. With paid-up additional insurance, the added coverage is permanent and contributes to the overall face value of the policy, enhancing the death benefit as inflation rises. This can ensure that K’s beneficiaries receive more substantial support to maintain purchasing power at the time of her passing. Other options do not offer the same level of protection against inflation. While cash payments provide immediate cash, they do not contribute to the policy's death benefit. The enhanced cash value option focuses on increasing the cash component, which may not assure a rising death benefit. The reduction of premium uses dividends to lower future premium payments, which does not augment the death benefit at all. Therefore, opting for paid-up additional insurance is the most effective way for K to achieve her goal of an increasing death benefit.