Which nonforfeiture option uses the policy's cash value to buy reduced coverage?

The nonforfeiture option that utilizes the policy's cash value to purchase reduced coverage is indeed the option that allows the policyholder to maintain a level of life insurance protection without further premium payments. In this case, the "Reduced Paid-Up" option allows the policyholder to take the accumulated cash value of their whole life insurance policy and apply it toward a new, smaller whole life policy without the need to pay additional premiums.

This option is beneficial for individuals who may no longer wish to pay premiums for their current policy but still desire some form of life insurance coverage. The insurance company calculates the amount of paid-up insurance based on the cash value available and the insured's age at the time the nonforfeiture option is exercised. As a result, the policyholder is left with a fully paid policy that has a cash value but provides lower death benefits compared to the original coverage.

The other options do not buy reduced coverage in the same way. The "Extended Term" option uses the cash value to purchase term insurance for a specified period, rather than a paid-up policy. "Cash Surrender" involves cashing out the policy entirely and would terminate coverage altogether, while a "Policy Loan" allows borrowing against the cash value but does not change