South Carolina Life and Health Practice Exam

When a decreasing term policy is purchased, what is its primary characteristic regarding premiums?

1. Decreasing premiums with level benefits

2. Level premiums with decreasing death benefit

3. Increasing premiums with increasing benefits

4. Level premiums with increasing death benefit

The correct answer is: Level premiums with decreasing death benefit

A decreasing term policy is primarily characterized by having level premiums while the death benefit decreases over time. This means that the amount of money paid in premiums remains consistent throughout the duration of the policy, providing predictability in the policyholder's budgeting. However, the amount that beneficiaries would receive in the event of the insured’s death declines incrementally, which is often correlated with a specific need, such as paying off a mortgage or other debt that reduces over time. This design suits individuals who expect their financial obligations to decrease, thereby allowing them to manage their insurance needs efficiently. As time passes, while the financial payout decreases, the premiums do not vary, which enhances affordability and makes financial planning easier. In contrast to the other options, which suggest various combinations of premium and benefit fluctuations, the essence of a decreasing term policy is that the premiums stay the same while the payout gradually diminishes.