What is a dividend option that uses dividends to purchase small, single-premium policies called?

The correct answer is the option related to paid-up additions, which refers to a dividend option wherein policyholders can use their dividends to purchase additional small, single-premium policies. This process allows the policyholder to increase their total death benefit and cash value over time without requiring an additional out-of-pocket premium payment.

Paid-up additions are a strategic way to leverage the dividends received from a whole life insurance policy, enhancing the policy's overall value. Each paid-up addition creates a new mini policy that contributes to the overall face amount and builds cash value, which can further benefit the policyholder or their beneficiaries. This approach is particularly advantageous because it utilizes the dividends effectively, making it a beneficial long-term financial planning tool.

In contrast, other dividend options, such as the reduction of premium, merely apply dividends directly to reduce the cost of upcoming premiums, while cash payout provides the dividends directly to the policyholder without generating additional coverage. The accumulate at interest option keeps dividends within the policy, but it does not specifically purchase additional coverage like paid-up additions do.