Oklahoma Life Producer Practice Exam

What type of life policy decreases the face amount over time and reaches zero at policy expiration?

1. Constant term

2. Decreasing term

3. Increasing term

4. Whole life

The correct answer is: Decreasing term

A policy that decreases the face amount over time and reaches zero at policy expiration is known as a decreasing term policy. This type of life insurance is specifically designed to provide coverage that reduces over a specified period, typically in line with decreasing financial obligations, such as a mortgage or other loans. As the insured amount diminishes, the premium typically remains level throughout the term of the policy. Decreasing term policies are beneficial for individuals who anticipate their insurance needs will decrease over time. For instance, as a mortgage balances decrease with each payment, having a declining death benefit can ensure that insurance coverage aligns with the decreasing debt, offering peace of mind during the life of the loan. In contrast, other types of life policies serve different purposes. Constant term insurance offers a fixed amount of coverage that remains unchanged throughout the life of the policy. Increasing term policies, as the name suggests, provide benefits that increase over time, often to keep pace with inflation or increasing financial needs. Whole life insurance provides a permanent coverage amount that does not decrease but instead may build cash value over time.