Texas Life Agent Practice Exam

Sandra Timms, age 27, is advised to purchase life insurance to cover a 20-year-amortized $50,000 business-improvement loan. Which of the following plans would adequately protect her at the minimum premium outlay?

1. A $50,000 whole life policy.

2. A $50,000 decreasing term policy for 20 years.

3. A $50,000 increasing term policy for 20 years.

4. A $50,000 level term policy for 20 years.

The correct answer is: A $50,000 decreasing term policy for 20 years.

The appropriate choice for Sandra Timms' situation is to select a $50,000 decreasing term policy for 20 years. A decreasing term policy is specifically designed to provide coverage that aligns with a debt that diminishes over time, such as a business-improvement loan that is being amortized over 20 years. As the loan balance decreases with each payment, the death benefit of the decreasing term insurance also reduces. This type of policy will match Sandra's financial obligation over the life of the loan, ensuring that if something were to happen to her, her beneficiaries would receive a benefit that is adequate to cover the remaining balance on the loan without her needing to pay for a higher premium associated with a policy that maintains a level or increasing death benefit. In contrast, a whole life policy, while providing permanent coverage, tends to have significantly higher premiums and would not be tailored to the diminishing nature of the debt. An increasing term policy would not be suitable since it offers a benefit that increases over time, which does not align with the decreasing liability of her loan. A level term policy would maintain the same death benefit of $50,000 throughout the term but would not be cost-efficient, as a policy that specifically decreases over time will result in lower overall premiums