Tennessee Insurance Practice Exam

Which type of term life policy is typically utilized for covering an insured's mortgage balance?

1. Level Term

2. Decreasing Term

3. Increasing Term

4. Annual Renewable Term

The correct answer is: Decreasing Term

The type of term life policy commonly used for covering an insured's mortgage balance is a decreasing term policy. This type of policy is designed so that the death benefit decreases over time, typically in line with the amortization schedule of a mortgage. As the insured makes payments on their mortgage, the outstanding balance decreases, and so does the policy's death benefit. This alignment ensures that if the insured passes away, the death benefit will cover the remaining mortgage balance, ultimately protecting the beneficiaries from inheriting a financial burden. Level term policies, on the other hand, maintain a constant death benefit throughout the term, which wouldn’t be appropriate for a mortgage since the balance decreases over time. Increasing term policies offer death benefits that rise throughout the term, which does not correspond with a mortgage's decreasing nature. Annual renewable term policies provide a death benefit that can be renewed annually, typically at increasing premiums, but do not specifically match the mortgage balance pattern. Thus, the decreasing term policy effectively suits the need to mitigate mortgage debt in the event of the insured's death.