What does it mean when a policy is described as 'paid up'?

A 'paid up' policy refers to a situation where premiums have ceased, typically because the policyholder has either stopped paying premiums or has reached a certain policy term specified in the contract. In this context, option B correctly reflects that when a policy is described as 'paid up,' premiums stop and the sum assured may be reduced. This often occurs in life insurance policies where, instead of continuing premium payments, the policyholder can allow the policy to remain in force at a reduced benefit level without any further contributions.

This scenario often arises when a policyholder opts to stop paying premiums after a certain number of payments have been made. In many cases, the remaining value of the policy is adjusted to account for the lack of future premium payments, thus resulting in a lower sum assured.

Other choices do not accurately describe the nature of a paid up policy. Continuing premiums with no changes to the sum assured would indicate the opposite of a paid up status. A refund for unearned premium typically applies to policy cancellations or lapses rather than to a 'paid up' status. Lastly, canceling a policy upon request without penalties relates to cancelation rights and does not define what it means for a policy to be 'paid up'.