South Carolina Life Insurance Practice Exam

If an individual borrows $10,000 on a 5-year note from a bank, what type of life insurance policy would be most appropriate for this situation?

1. Term Life

2. Whole Life

3. Decreasing Term Life

4. Universal Life

The correct answer is: Decreasing Term Life

In the context of borrowing money on a note, a decreasing term life insurance policy is particularly suitable because it provides coverage that diminishes over time, typically aligning with the decreasing balance of a debt. When someone borrows money, the risk the lender takes is that the borrower may not be able to repay the loan in the event of death. A decreasing term policy is designed to match the outstanding loan amount; as the borrower's obligation to the bank decreases over the term of the loan, so does the coverage amount of the policy. Since the loan in this scenario is for a specific amount of $10,000 over five years, a decreasing term policy can be structured to provide an effective safety net. At the start of the term, the coverage amount will match the loan amount, and as time progresses and the loan is paid down, the coverage amount will decrease accordingly. This makes it a cost-effective option since term policies generally have lower premiums compared to whole life insurance. On the other hand, other types of life insurance, such as term, whole, or universal life, do not align as precisely with the decreasing liability of the loan. A standard term life policy would provide a fixed amount of coverage throughout the entire term, which could result in paying