South Carolina Life Insurance Practice Exam

Which type of life insurance is best suited to cover a mortgage?

1. Whole life insurance

2. Decreasing term life insurance

3. Universal life insurance

4. There is no cash value to borrow against

The correct answer is: Decreasing term life insurance

Decreasing term life insurance is specifically designed to provide a death benefit that decreases over time, often in line with the repayment of a mortgage. This type of insurance is particularly beneficial for homeowners who want to ensure that their mortgage balance is covered in the event of their untimely death. As the mortgage balance decreases with each payment, the death benefit also reduces, which aligns perfectly with the financial obligation of the homeowner. This suitability stems from the fact that most mortgages are structured in such a way that they decrease gradually as payments are made. With decreasing term life insurance, policyholders pay lower premiums compared to whole life or universal life products, making it a cost-effective choice for those specifically looking to cover their mortgage. Additionally, while whole life and universal life insurance do provide coverage, they also come with cash value accumulation features, which are not needed when the primary focus is merely to provide a payout that matches the declining balance of a mortgage. Therefore, decreasing term life insurance is optimal for this purpose, as it addresses the specific financial risk associated with mortgage debt without unnecessary additional features.