Which option allows a policyholder to use dividends to increase their life insurance coverage?

The option that allows a policyholder to use dividends to increase their life insurance coverage is the paid-up addition option. This option enables policyholders to take the dividends they receive from their life insurance policy and use them to purchase additional paid-up insurance. As a result, the policyholder's death benefit increases without needing to pay additional premiums for this added coverage.

The paid-up additions are effectively small whole life insurance policies that accumulate cash value and provide additional death benefits, enhancing the overall coverage the policyholder has. Since these additions are fully paid for using the dividends, they do not require further premiums, making them a valuable way to increase coverage gradually over time.

Cash dividends provide policyholders with the choice of taking their dividends in cash but do not specifically allow for the purchase of additional coverage. The reduced paid-up option allows the policyholder to stop paying premiums and convert their existing policy into a paid-up policy of lesser value, which does not increase the coverage. The waiver of premium option is a rider that helps ensure premiums are waived in case of disability, but it does not pertain to the use of dividends for increasing coverage.