If an insured has accumulated dividends to reduce her next premium from $1,200 to $1,025, what dividend option has she chosen?

When an insured chooses to use accumulated dividends to reduce her next premium, this reflects the dividend option known as reduction of premium. This option allows policyholders to utilize their dividends to lower the amount they need to pay for their insurance premium, thereby making it more manageable and lessening the financial burden.

In this scenario, the insured had a premium of $1,200 and decided to apply her dividends to reduce that amount to $1,025. This specific approach directly aligns with the reduction of premium option, as it demonstrates a practical application of dividends in managing policy costs. The other options, such as cash payout or accumulate at interest, would not result in a reduction of the premium amount in the same manner. Paid-up additions involve using dividends to purchase additional life insurance coverage rather than directly lowering the premium cost, making reduction of premium the clear correct choice in this case.