Decreasing Term

Decreasing term insurance is commonly used to:

1. A.Cover a declining debt like a mortgageCorrect - benefit tracks the shrinking loan.
2. B.Fund retirement incomeRetirement income requires an accumulating asset the client can draw from. This product holds no cash value, and its benefit shrinks as time passes rather than growing.
3. C.Insure a growing liabilityThis runs backwards. A benefit that declines is built to track an obligation that declines; a growing liability calls for level or increasing coverage instead.
4. D.Build large cash valueNo term product accumulates cash value. The premium buys pure protection for the stated period, which is exactly why this design is inexpensive.

Why: Decreasing term has a death benefit that declines over time, matching a falling balance such as a mortgage.

A couple wanting coverage matched to a declining mortgage balance is suited to:

1. A.An immediate annuityAn immediate annuity begins paying the client income right away. It carries no death benefit that could retire a mortgage balance for the survivor.
2. B.Decreasing term insuranceCorrect - benefit tracks the falling loan.
3. C.Increasing whole lifeThis moves in the wrong direction and lasts the wrong length of time. A benefit that grows would drift further from a balance that is shrinking, and permanent coverage costs more than the need calls for.
4. D.Accidental death onlyThis responds only if the death is accidental, leaving the mortgage unprotected against the far more common causes of death. The need here is coverage that pays regardless of cause.

Why: Decreasing term has a benefit that falls over time, matching a shrinking mortgage.

Perpetua buys a 20-year decreasing term policy with an initial face amount of 240,000 dollars that declines in equal annual steps to zero at the end of year 20, with each reduction taken on the policy anniversary. She dies during policy year 9, after eight anniversaries have passed. What death benefit is payable?

1. A.132,000 dollarsThis subtracts nine reductions. The ninth anniversary has not arrived when she dies during year 9.
2. B.240,000 dollarsThis treats the policy as level term. The defining feature of decreasing term is that the face amount falls on schedule.
3. C.144,000 dollarsCorrect. Eight reductions of 12,000 dollars leaves 144,000 dollars in force.
4. D.156,000 dollarsThis subtracts only seven reductions and undercounts the elapsed anniversaries by one.

Why: An equal-step decreasing term reduces the face amount by the initial face divided by the term, here 240,000 divided by 20, or 12,000 dollars each anniversary. Eight anniversaries have passed, so 8 x 12,000 = 96,000 dollars has come off, leaving 144,000 dollars in force during year 9. The clue is that she dies DURING year 9, meaning the ninth reduction has not yet occurred.

A client wanting coverage that declines over time to track a mortgage balance should buy:

1. A.Level termIt would in fact cover the loan, which is why it is tempting. But the face amount stays put while the balance amortizes down, so the client keeps paying for protection that outgrows the debt.
2. B.Decreasing termCorrect - benefit shrinks like the loan.
3. C.A deferred annuityAn accumulation product with no death benefit tied to the loan. The mortgage would be left unprotected if the borrower died.
4. D.Increasing whole lifeMoves the benefit in the wrong direction as the balance falls, and adds permanent-coverage cost for an obligation that eventually ends.

Why: Decreasing term's benefit declines over time, matching an amortizing loan.