South Carolina Life Insurance Practice Exam

What type of term insurance decreases in value over the policy term?

1. Level Term

2. Increasing Term

3. Decreasing Term

4. Return of Premium Term

The correct answer is: Decreasing Term

Decreasing term insurance is designed specifically for situations where the beneficiary's needs for coverage will decline over time. This is often associated with financial obligations that decrease, such as a mortgage or a loan. With decreasing term insurance, the death benefit diminishes at a predetermined rate throughout the policy's term. This structure makes it an ideal choice for individuals who have liabilities that will lessen as time progresses. For example, as a mortgage is paid down, the coverage amount can decrease correspondingly, reflecting the decreasing need for insurance protection. This is distinctly different from other forms of term insurance. In contrast, level term insurance maintains a consistent death benefit throughout the life of the policy, while increasing term insurance offers a death benefit that grows over time. Return of premium term policies refund the premiums if the insured survives the policy term, but they do not decrease in value. These features highlight the unique role that decreasing term insurance plays in financial planning, catering to those with short-term, diminishing financial responsibilities.