An insured pays $1,200 annually for her life insurance premium and uses $300 worth of accumulated dividends to reduce the next year's premium. What option does this describe?

The scenario describes the "Reduction of Premium" option, which is a method used by policyholders to lower their upcoming premium payments by using dividends earned from their life insurance policy. In this case, the insured has earned $300 in dividends and chooses to apply that amount directly to decrease her premium from $1,200 to $900 for the next year.

This option is significant as it illustrates one of the benefits of participating whole life insurance policies, where policyholders can receive dividends based on the insurer’s financial performance. By opting for the reduction of premium, the insured can effectively manage her cash flow while maintaining her coverage, making it a practical choice for many policyholders.

Other options do not accurately represent this situation. For instance, the flexible premium option involves varying premium payments rather than applying dividends towards premium reduction. Accumulation at interest refers to the way dividends may earn interest if they are left within the policy rather than directly reducing future premiums. The cash option typically involves the policyholder taking their dividends in cash rather than applying them to premiums. Therefore, the choice of reduction of premium clearly aligns with the use of accumulated dividends to lower future premium obligations.