What is the purpose of the paid-up addition option?

The paid-up addition option allows policyholders to enhance their life insurance coverage without requiring additional underwriting or medical exams. This option permits the purchase of additional, smaller amounts of the same type of insurance as is included in the original policy, effectively increasing the death benefit. These additional amounts are usually funded through dividends from the original policy, which can be beneficial for policyholders looking to expand their coverage while keeping the same type of benefits intact.

In contrast, the other options relate to different uses of dividends or policy features. For instance, purchasing one-year term insurance is a distinct strategy that does not specifically correlate to the paid-up addition feature, which focuses on augmenting existing coverage. Similarly, using dividends for retirement savings would typically involve different products or strategies. Reducing the next year's premium does not describe the core function of paid-up additions, which is all about increasing the policy’s benefit rather than altering premium obligations.