Management Notes

Reference Notes for Management

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?

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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?

 Options:

A) Level term policy
B) whole life policy
C) Limited-pay policy
D) Decreasing term policy

The Correct Answer Is:

  • D) Decreasing term policy

A decreasing term policy is the correct choice for F’s specific needs. This type of life insurance provides coverage for a limited amount of time, and the death benefit decreases regularly according to a predetermined schedule. Let’s delve into why this option is correct and why the other options are not suitable for F’s situation.

Correct Answer: D) Decreasing Term Policy

A decreasing term policy is designed to cater to specific financial needs, such as paying off a mortgage or other debts that decrease over time. Here’s why this option is the right choice for F:

  1. Limited Coverage Period: F mentioned that they need coverage for only a limited amount of time. A decreasing term policy typically offers coverage for a fixed duration, such as 10, 15, or 20 years. This aligns perfectly with F’s requirement for coverage that isn’t lifelong.
  2. Death Benefit That Changes Regularly: In a decreasing term policy, the death benefit decreases regularly according to a schedule. This feature is ideal for individuals like F who have financial obligations that decrease over time, such as a mortgage or other loans. As they pay down these debts, the need for a high death benefit decreases, and so does the coverage amount.
  3. Cost-Effective: Decreasing term policies are generally more affordable than other types of life insurance, such as whole life or universal life. Since the death benefit reduces over time, the premiums are lower compared to policies with a fixed death benefit. This makes it a cost-effective choice for F.
  4. Targeted Financial Protection: F’s primary concern is likely to provide financial protection for their loved ones in case of their untimely death while they still have outstanding loans or mortgages. A decreasing term policy ensures that there’s enough coverage to address these specific financial obligations without paying for unnecessary coverage that might come with other policies.

Now, let’s explore why the other options are not suitable for F’s needs:

A) Level Term Policy

A level term policy offers a fixed death benefit and a fixed premium for a specific term. While it can provide stable coverage and predictable premiums, it doesn’t align with F’s requirement for a death benefit that changes regularly according to a schedule.

Level term policies are better suited for individuals who want a consistent death benefit throughout the policy term.

B) Whole Life Policy

A whole-life policy provides lifelong coverage and typically includes a cash value component. This type of policy is designed for long-term financial planning and estate planning rather than short-term, decreasing coverage needs.

Whole-life policies come with significantly higher premiums compared to term-life policies, which may not be cost-effective for F’s limited coverage requirement.

C) Limited-Pay Policy

A limited-pay policy is a whole life or universal life policy that allows the policyholder to pay premiums for a fixed number of years, after which the policy remains in force for life.

These policies are designed for long-term coverage and wealth accumulation. F’s requirement is for coverage with a limited duration, so a limited-pay policy is not suitable as it extends coverage beyond the needed timeframe.

In conclusion, F’s specific needs for life insurance coverage that is limited in duration and has a decreasing death benefit over time align perfectly with a decreasing term policy.

This option not only offers the required coverage but is also cost-effective and tailored to address F’s financial obligations as they decrease.

The other options, such as level term, whole life, and limited-pay policies, are not suitable because they do not meet F’s unique needs for coverage that changes regularly and is limited in duration.

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