Which of the following is true regarding dividends in whole life insurance?

Dividends in whole life insurance are a key benefit, and understanding their nature is crucial. When a policy performs below expectations, the dividends may indeed be impacted, which can lead to a requirement for additional payments to maintain the policy's status. This is because whole life insurance policies often provide dividends based on the insurer's performance, and if the insurer does not meet certain financial benchmarks, the dividends may be lower, potentially requiring the policyholder to make extra payments to keep the policy active or to cover any shortfall.

In contrast, while dividends can be received in various forms such as cash, paid-up additions, or premium reductions, they are not guaranteed under all circumstances; their declaration is subject to the performance of the insurance company. Thus, the notion that they can only be received in cash is inaccurate.

Additionally, while whole life policies typically provide dividends, they are not guaranteed to be paid out every year, nor are they intended to permanently increase the policy's coverage. Any increase in coverage through dividends would be conditional and typically involves utilizing dividends to purchase paid-up insurance, which would still follow the performance of the company. Therefore, the correct understanding of dividends also underscores their relationship to policy performance and the potential need for additional contributions under specific circumstances.