Final answer:
The paid-up addition option in life insurance allows policyholders to use their dividends to purchase additional insurance coverage, which adds to the policy's death benefit and cash value. This feature can be part of a retirement savings strategy as it contributes to financial stability in old age.
Step-by-step explanation:
The paid-up addition option in cash-value (whole) life insurance policies allows policyholders to use their dividends in a unique way. Instead of taking the dividends as cash or using them to reduce the next year's premium, policyholders can opt to use their dividends to purchase additional amounts of the same type of insurance as the original policy. This increases the death benefit and the cash value of the policy without increasing the premium, essentially using the dividends to buy more insurance coverage.
Many people use life insurance as part of their retirement savings, as it can provide a death benefit and accumulate cash value that can be utilized in retirement. When considering life insurance as part of savings for old age, it's essential to understand different options like the paid-up addition feature that can enhance the policy's value and contribute to financial stability in retirement.