What does the paid-up addition option in a life insurance policy allow the policyholder to do with their dividends?

The paid-up addition option in a life insurance policy allows the policyholder to purchase a larger amount of permanent life insurance coverage using their policy dividends. This option enables policyholders to enhance their death benefit and grow their cash value effectively without the need for additional premiums. The added insurance is referred to as a "paid-up addition" because the additional coverage is fully paid for and does not require further payments to keep it active.

The other choices do not accurately represent the function of the paid-up addition option. For instance, withdrawing dividends as cash without cost implies that the dividends would not contribute to additional insurance coverage or cash value growth, which is contrary to how the paid-up addition operates. Instead, the focus of the paid-up addition is on increasing the insurance provision rather than providing immediate cash access or smaller coverage options. This solidifies the understanding that the paid-up addition is fundamentally about enhancing coverage rather than any cash withdrawal features or reduced benefits.