F needs life insurance that provides coverage for only a limited amount of time with a death benefit that changes regularly according to a schedule. What kind of policy is needed?
A. Level term policy
B. Whole life policy
C. Limited-pay policy
D. Decreasing term policy
The Correct Answer and Explanation is:
Correct Answer: D. Decreasing term policy
Explanation:
A decreasing term life insurance policy is a type of term life insurance where the death benefit decreases over the policy term according to a predetermined schedule. This type of policy is ideal for individuals who need coverage for a limited period, particularly when their financial obligations reduce over time. For example, it is commonly used to cover a mortgage or other loans that decrease in balance as they are paid off.
In this scenario, F needs life insurance with:
- Coverage for a limited amount of time: Term life insurance, including decreasing term policies, provides coverage for a specific period (e.g., 10, 20, or 30 years), unlike whole life insurance which offers lifelong coverage.
- A death benefit that changes regularly: A decreasing term policy is unique because its death benefit reduces at regular intervals, typically reflecting a decline in financial responsibilities over time.
Here’s how a decreasing term policy works:
- Premiums: The premiums are generally fixed and lower than other types of life insurance, such as whole life insurance.
- Coverage Schedule: The policy’s face value (death benefit) decreases according to a preset schedule, which might align with the balance of a mortgage or other debts.
Why Other Options Are Incorrect:
- A. Level term policy: The death benefit remains constant throughout the term, which does not meet F’s need for a decreasing death benefit.
- B. Whole life policy: This provides permanent coverage with a fixed death benefit and includes a cash value component, making it unsuitable for F’s temporary and adjustable needs.
- C. Limited-pay policy: This refers to whole life insurance where premiums are paid for a limited period, but the coverage lasts a lifetime.
A decreasing term policy provides F with cost-effective, temporary coverage that aligns with diminishing financial obligations.