South Carolina Life Insurance Practice Exam

What happens to the benefits of a decreasing term policy?

1. They remain constant throughout the term

2. They exceed the initial premium amount

3. They decrease over the term of the policy

4. They are paid out immediately upon application

The correct answer is: They decrease over the term of the policy

In a decreasing term policy, the face amount of the insurance benefit is designed to decrease over the duration of the policy term. This structure is particularly useful for individuals who have specific financial obligations, such as a mortgage or a loan, that reduce over time. As the outstanding balance on these debts decreases, the amount of coverage provided by the policy also diminishes accordingly. This means that if the insured passes away while the policy is in force, the beneficiary will receive the current face value of the policy, which would be less than the original amount at the time of application. The decreasing nature of the benefit aligns with the diminishing financial responsibility that the insured might have, serving as a way to match insurance coverage with actual financial needs over time. In contrast, other options suggest benefits that either remain constant, exceed the premium, or are immediately available upon application, which do not accurately represent the characteristics of a decreasing term life insurance policy.