The reduced premium dividend option applies a participating policy ' s declared dividend toward the next premium due. Instead of receiving the dividend in cash, leaving it with the insurer at interest, or purchasing additional paid-up insurance, the policyowner uses the dividend to reduce the amount that must be paid out of pocket for the next scheduled premium.
For example, if the annual premium is $1,000 and the insurer declares a $150 dividend, application of the reduced-premium option would ordinarily leave the policyowner responsible for the remaining $850 premium.
Under the accumulation at interest option, the insurer retains the dividend and credits interest to it. Under the cash option, the dividend is paid directly to the policyowner. With paid-up additions, the dividend purchases small increments of fully paid permanent life insurance, increasing both the total death benefit and cash-value potential.
Dividends on participating life policies are not guaranteed because they depend on the insurer ' s divisible surplus and experience. The question, however, concerns the use of an already declared dividend.
Applying that dividend directly against the next premium is precisely the reduced premium option.
Study Guide Reference: Life Insurance Policy Provisions, Options, and Riders — participating-policy dividends; reduced premium; cash; accumulation at interest; paid-up additions.
