Multiple Choice
Which type of accounting is primarily concerned with protecting business assets against risks such as fire, theft, and other hazards?
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1. Introduction to Accounting
Types of Accounting
Multiple Choice
When a reduced paid-up nonforfeiture option is chosen in an insurance policy, what happens to the face amount of the policy?
A
The policy is canceled and all coverage ends.
B
The face amount remains the same, but premium payments stop.
C
The face amount increases due to accumulated dividends.
D
The face amount is reduced and the policy remains in force as paid-up insurance.
Verified step by step guidance1
Understand the concept of a reduced paid-up nonforfeiture option: This option allows the policyholder to stop paying premiums while keeping the policy in force. However, the face amount of the policy is reduced.
Clarify the term 'face amount': The face amount refers to the death benefit or the amount payable to beneficiaries upon the insured's death.
Analyze the impact of choosing the reduced paid-up option: When this option is selected, the policyholder uses the cash value accumulated in the policy to purchase a smaller amount of paid-up insurance. This means the policy remains active without further premium payments, but the coverage amount is reduced.
Compare the reduced paid-up option to other nonforfeiture options: Other options, such as cash surrender or extended term insurance, have different effects on the policy. The reduced paid-up option specifically reduces the face amount while maintaining coverage.
Conclude that the correct answer is: 'The face amount is reduced and the policy remains in force as paid-up insurance.' This aligns with the definition and mechanics of the reduced paid-up nonforfeiture option.
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