California Insurance License Exam Practice Test Practice Question
Your client has just bought a new home which he has financed with a $150,000, 7.5% interest, 30-year bank loan. He would like to be sure that if he dies prematurely, the unpaid balance of the mortgage would be paid. He wants a policy that will cover the mortgage balance - no more, no less - anytime during the life of the mortgage. Which policy is designed to meet this need?
Correct Answer: D
Rationale: A decreasing term policy is specifically designed to cover obligations like a mortgage, as the coverage amount decreases over time in line with the unpaid balance of the loan. This aligns perfectly with the client's need to ensure the mortgage is paid off if he dies prematurely.
A level term policy provides a fixed death benefit throughout the term, which would not adjust to match the declining mortgage balance. A home service policy typically offers smaller face amounts and is not specifically structured for mortgage coverage. An increasing term policy, conversely, offers a rising death benefit, which would exceed the mortgage balance and is unnecessary for this situation.
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