South Carolina Life Insurance Practice Exam

What policy component must decrease in decreasing term insurance?

1. Premium amount

2. Face amount

3. Cash value

4. Beneficiary benefit

The correct answer is: Face amount

In decreasing term insurance, the face amount is the component that must decrease over time. The face amount represents the death benefit that the policyholder's beneficiaries will receive upon the policyholder's death. In this type of policy, the death benefit is set to decline at a predetermined rate over the life of the policy. This structure is often utilized for specific financial obligations that diminish over time, such as a mortgage or a loan. As the outstanding balance of the debt decreases, so does the face amount of the insurance, which provides coverage that aligns with the reducing liability. While the premium amount can vary based on the insurer's underwriting practices, it does not decrease automatically with the face amount. Similarly, with decreasing term insurance, there is generally no cash value component because it is a pure term product—meaning it only pays out the death benefit and does not build cash value over the policy's duration. Lastly, the beneficiary's benefit refers to who receives the death benefit, which remains a constant aspect of the policy and does not decrease. Thus, the face amount is the essential feature that decreases in this type of insurance policy.