PSI Life Exam Practice Test

What nonforfeiture option allows the policyowner to purchase less coverage for life?

1. Extended term insurance

2. Reduced paid-up insurance

3. Cash surrender value

4. Paid-up additions

The correct answer is: Reduced paid-up insurance

The option that allows the policyowner to purchase less coverage for life is reduced paid-up insurance. This nonforfeiture option is designed for situations where the policyowner can no longer afford to pay premiums on a whole life insurance policy but wishes to keep a form of coverage. When the policyowner selects reduced paid-up insurance, the policy’s cash value is used to purchase a new, fully paid-up policy of lesser face value than the original. This means that instead of continuing to pay premiums for a decreased amount of insurance that would terminate if enough premiums are not paid, the policyholder retains life insurance coverage without further payments, albeit at a reduced benefit level. The other options do not provide a reduction in coverage but serve different purposes. For example, extended term insurance allows the policyholder to convert the cash value into a term insurance policy for a specified number of years, which maintains the full face value but only for a limited time. The cash surrender value provides the option to take the accumulated cash value of the policy but terminates coverage entirely. Paid-up additions are additional coverage purchased using the policy's dividends, which does not align with the idea of reducing coverage.