South Carolina Life Insurance Practice Exam

What statement is true regarding a decreasing term policy?

1. It provides benefits that increase over time

2. The payable premium amount steadily declines throughout the duration of the contract

3. It is more expensive than level term insurance

4. It is suitable for short-term financial needs

The correct answer is: The payable premium amount steadily declines throughout the duration of the contract

A decreasing term policy is designed specifically so that the death benefit decreases over the policy's term, while the premium amount remains level throughout the life of the policy. This structure makes the decreasing term policy particularly attractive for specific financial needs, such as paying off a mortgage or other debts that diminish over time. Understanding this, the option noting the declining payable premium amount throughout the contract is not accurate. The premiums are typically consistent and do not decrease. On the other hand, if looking at cost comparisons, decreasing term policies are usually less expensive than both level term insurance and permanent insurance options, as the risk to the insurer diminishes over time along with the decreasing coverage. In terms of suitability, decreasing term insurance is primarily aimed at individuals who expect their financial obligations to decrease over time, which aligns with short-term needs but does not inherently indicate fluctuating premiums. Thus, this option does not fully capture the essence of a decreasing term policy. Therefore, the correct understanding aligns with the nature and features of a decreasing term policy, which is beneficial for individuals with specific, short-term obligations that lessen over time, making it suitable for their needs without implying any reduction in the premium.