When a life insurance policyowner exercises the policy's reduced paid-up option, they are effectively converting the existing policy into a paid-up policy with a reduced face amount. Here's a detailed, step-by-step explanation:
1. Understanding the Reduced Paid-Up Option:
- This option allows the policyowner to stop paying premiums while keeping the policy active.
- The face value of the policy is reduced to an amount that the existing cash value can support, without requiring any further premiums.
2. Consequences of Choosing Reduced Paid-Up Option:
- Since no additional premiums are required, the policy's coverage amount is recalculated based on the current cash value.
- This results in a new policy amount, which is typically significantly lower than the original face value.
3. Analysis of Each Statement:
- Statement 1: "The amount of coverage will be much less than the original coverage."
- This is true because the reduced paid-up option uses the existing cash value to determine the new, reduced face value of the policy, which is always less than the original coverage amount.
- Statement 2: "The premiums will be higher than the original policy."
- This is false because no further premiums are required once the reduced paid-up option is exercised.
- Statement 3: "The policy's cash value will stop accumulating."
- This is false because the cash value may still accumulate, depending on the type of policy and the terms of the specific reduced paid-up option.
- Statement 4: "The premiums will be lower than the original policy."
- This could be misleading. While no premiums are required under the reduced paid-up option, it's more accurate to say that there are no further premiums, not just that they are lower.
4. Conclusion:
- Among the provided statements, the statement "The amount of coverage will be much less than the original coverage" is true. This correctly describes the impact of exercising the reduced paid-up option on a life insurance policy.
Therefore, the correct choice is:
- The amount of coverage will be much less than the original coverage.
