Looking for the answer to the question below related to Management ?
A(n) ___________ term life policy is normally used when covering an insured’s mortgage balance.
Options:
| a) increasing b) decreasing c) level d) variable |
The Correct Answer Is:
- b) decreasing
Answer Explanation:
A decreasing term life insurance policy is typically used to cover an insured individual’s mortgage balance. This choice is correct because it aligns with the specific purpose and features of decreasing term life insurance.
- Explanation of the Correct Answer (Decreasing Term Life Insurance):
Mortgage Coverage:
In order to match the decreasing mortgage balance, decreasing term life insurance is designed specifically for homeowners. As a homeowner pays off their mortgage, the outstanding balance decreases. Term insurance that is decreasing ensures that the coverage amount decreases in line with the outstanding mortgage balance as the homeowner pays off their mortgage.
In the event of the insured’s untimely death, the payout of the insurance decreases as the mortgage is paid down, protecting their family and their home.
Affordability:
For homeowners who are looking to protect their financial well-being without breaking the bank, decreasing term life insurance is generally more affordable than other types of life insurance, such as whole life and universal life.
Temporary Coverage:
The decreasing term life insurance policy provides coverage for a specified period, such as 15, 20, or 30 years, as is the case with other term life insurance policies. People who have a mortgage to repay and dependents who rely on their income are well served by this plan.
Specific Purpose:
In this type of policy, the insured person’s mortgage is paid off if they pass away during the mortgage term. It is not intended for long-term savings or as an investment vehicle.
Cost-Effective:
Term life insurance with decreasing coverage typically has lower premiums than other types of life insurance with level or increasing coverage amounts because the coverage decreases over time. Those who want to manage their budget while protecting their family’s financial stability will find it appealing.
Now, let’s explain why the other options (a) increasing, (c) level, and (d) variable are not the correct answers:
- a) Increasing Term Life Insurance:
It is common to choose increasing term life insurance to keep pace with inflation or to provide for increasing financial obligations, such as a growing family. As a result, coverage would exceed the mortgage amount, which would be unnecessary and expensive. It is not suitable for covering a mortgage balance.
- c) Level Term Life Insurance:
A level term life insurance policy provides a fixed amount of coverage throughout the policy’s term. This type of policy doesn’t change based on the decreasing mortgage balance.
Though level term insurance is suitable for a variety of purposes, it is not the best choice for mortgage protection as the amount of coverage doesn’t decrease along with the balance of the mortgage.
- d) Variable Term Life Insurance:
With variable life insurance, policyholders have the option of investing in various investment funds in addition to receiving a death benefit. As a result of the performance of the investments, the policy’s cash value can fluctuate.
This particular financial goal cannot be met by variable life insurance since it is a more complex policy that may not be as cost-effective or straightforward as decreasing term life insurance.
In summary, a decreasing term life insurance policy is the correct choice when covering an insured’s mortgage balance because it is tailored to this specific purpose. It offers decreasing coverage that matches the mortgage balance over time, is cost-effective, and provides essential financial protection for homeowners and their families.
The other options, including increasing, level, and variable term life insurance, do not align with the unique needs and characteristics of mortgage protection and may not be the most suitable choice for this purpose.