Rhode Island Life Insurance Practice Exam

What type of term life policy is generally used for covering an insured's mortgage?

1. Level term

2. Decreasing term

3. Increasing term

4. Annual renewable term

The correct answer is: Decreasing term

A decreasing term life insurance policy is specifically designed to provide coverage that aligns with the mortgage balance over time. As the insured makes payments on their mortgage, the amount owed decreases. This type of policy mirrors that decline, with the death benefit reducing in a coordinated manner to match the diminishing loan balance. The primary purpose of decreasing term life insurance is to ensure that, in the event of the insured's death, the remaining mortgage amount can be fully paid off, protecting the beneficiaries from financial burden and ensuring that they can retain the home without the pressures of ongoing mortgage liability. This contrasts with other policy types such as level term, which maintains a consistent death benefit throughout the policy term, and increasing term, which provides an ever-growing death benefit. Annual renewable term policies offer a yearly renewal feature but do not adjust the benefit in relation to the needs of a mortgage. Thus, decreasing term is the most suitable choice for covering a mortgage as it aligns directly with the liability reduction over time.