What are the three basic purposes for which policy dividends can be used?

The correct answer highlights three fundamental ways policy dividends can be utilized within a life insurance context. Policy dividends, which are a return of a portion of the premiums paid when an insurance company performs better than anticipated, can serve various purposes.

Using dividends for savings is a common practice where policyholders can reinvest their dividends back into their policy, potentially growing their cash value over time. This action not only aids in increasing the overall value of the insurance policy but also enhances the financial security of the policyholder.

Acquiring more life insurance with dividends allows policyholders to increase their coverage without incurring the full cost of new premiums. This can be an effective way to enhance protection for the policyholder's beneficiaries as their needs change over time.

Reducing premiums represents another strategic advantage of using dividends. By applying dividends to reduce future premium payments, policyholders can alleviate some of the ongoing costs of maintaining their life insurance coverage, making it more affordable over the long term.

This combination of utility demonstrates the flexibility and value of policy dividends, ensuring that they play a crucial role in a policyholder’s financial and insurance planning strategies.