What effect do paid-up additions have on a life insurance policy?

Paid-up additions are a feature of whole life insurance policies that allow policyholders to purchase additional coverage using dividends without the need for additional premium payments. When paid-up additions are added to a policy, they increase both the death benefit and the cash value of the policy. They also contribute to the policy's loan value, which represents the amount of money a policyholder can borrow against the policy.

The correct choice focuses on how these additions impact both the cash and loan values. As paid-up additions accumulate, they enhance the policy's cash value, allowing the policyholder to access additional funds through loans or withdrawals, if needed. This feature strengthens the underlying value of the policy, making it a valuable component for long-term financial planning.

In contrast, the other options don't accurately reflect the nature of paid-up additions or their effects. For instance, they do not increase the premium cost as they are funded by dividends; they actually enhance the death benefit rather than reduce it; and they do not have any connection to the number of beneficiaries, which is a separate aspect of policyholder design and estate planning.