Tennessee Life Producer Practice Exam

Which option allows a policyholder to avoid losing benefits when discontinuing a policy?

1. Cash surrender option

2. Reduced Paid-Up option

3. Paid-Up insurance option

4. Rider option

The correct answer is: Reduced Paid-Up option

The Reduced Paid-Up option is a valuable feature in certain life insurance policies that allows a policyholder to avoid losing benefits when they decide to discontinue paying premiums. When a policyholder chooses this option, the insurer uses the accumulated cash value of the policy to purchase a reduced amount of paid-up insurance. This means that instead of letting the policy lapse and losing coverage, the policyholder retains a smaller amount of life insurance without needing to pay additional premiums. This option provides a way for policyholders to preserve some form of coverage even if they can no longer afford regular premium payments. It is particularly advantageous for those who may have experienced financial difficulties but want to ensure that their beneficiaries still receive a death benefit. In contrast, other options like the cash surrender option typically involve terminating the policy altogether for a cash payout, which means losing all benefits associated with the life insurance coverage. The paid-up insurance option allows for a full paid-up policy but may not have the same context as the reduced coverage similarly offered by the Reduced Paid-Up option. Riders are additional provisions that modify a policy but do not specifically address the issue of policy discontinuation.