Rhode Island Life Insurance Practice Exam

What type of life insurance policy is best for protecting a 15-year mortgage?

1. 15-year increasing term

2. 15-year decreasing term

3. Whole life

4. Universal life

The correct answer is: 15-year decreasing term

The most suitable type of life insurance policy for protecting a 15-year mortgage is a 15-year decreasing term policy. This type of policy is specifically designed to cover a debt that reduces over time, such as a mortgage. As the principal balance of the mortgage decreases with each payment made, the coverage amount on the policy also decreases correspondingly, which ensures that the life insurance aligns closely with the remaining mortgage balance. Choosing this policy offers the advantage of having a lower premium compared to whole life or universal life insurance, making it a cost-effective option for homeowners looking to provide financial security for their family in the event of their passing. The decreasing term structure means that the death benefit goes down over time, directly relating to the homeowner's mortgage obligations. Whole life insurance provides lifelong coverage with a cash value component but does not adjust for a mortgage that diminishes over time. Similarly, universal life insurance offers flexibility in premium payments and death benefits but is not tailored specifically to cover decreasing debts like a mortgage. 15-year increasing term policies would not be effective for this scenario since they would see the death benefit increase over time, opposite to the mortgage balance which is decreasing. Thus, the 15-year decreasing term policy is the ideal choice for protecting a mortgage.