When an insured decides to receive dividends from their whole life policy, which option involves using those dividends to pay for additional insurance coverage?

The correct choice is indeed the option that refers to using dividends to purchase additional insurance coverage, which is known as paid-up additions. When an insured elects this option, the dividends earned on the whole life policy are used to buy paid-up insurance, effectively increasing the policy's death benefit without requiring additional premiums. This not only bolsters the death benefit but also contributes to the cash value of the policy, compounding the benefits over time.

This option is particularly advantageous because it allows policyholders to enhance their coverage automatically through the growth of their policy's dividends, fostering both a larger payout for beneficiaries and increased cash value for the insured.

The other available choices do not represent the utilization of dividends for additional insurance coverage. The cash option simply provides the policyholder with cash payments, the accumulated interest option allows dividends to earn interest, and the reduction of premium option applies dividends towards lowering future premium payments instead of purchasing more insurance.