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?

Rationale

Decreasing term policy.

A decreasing term policy is specifically designed to provide a death benefit that declines over time, which aligns with the unpaid balance on a mortgage as it decreases with each payment. This type of policy ensures that the coverage matches the outstanding mortgage amount throughout the loan term, making it an ideal choice for mortgage protection.

A (Level term policy.) YOUR ANSWER

A level term policy provides a fixed death benefit that remains constant throughout the policy's term. This does not match the client's need, as the mortgage balance decreases over time, while the level term policy would not adjust to reflect this diminishing liability.

B (Home service policy.) YOUR ANSWER

A home service policy typically offers coverage for final expenses or small loans, often with limited benefits. It is not tailored to cover a decreasing mortgage balance, making it unsuitable for the client's purpose of securing mortgage debt.

C (Increasing term policy.) YOUR ANSWER

An increasing term policy features a death benefit that rises over time, which could be beneficial for inflation adjustments but does not align with the client's requirement for coverage that directly correlates to a decreasing mortgage balance. Therefore, it does not meet the specific need for mortgage protection.

D (Decreasing term policy.) CORRECT

As previously stated, a decreasing term policy is designed to provide a death benefit that corresponds with the declining balance of a mortgage, making it the most appropriate choice for the client. It ensures that the mortgage will be fully covered in the event of premature death, matching the financial obligation at every stage.

Conclusion

To address the client's concern of securing the mortgage balance in case of untimely death, a decreasing term policy serves as the most suitable solution. It aligns perfectly with the mortgage structure by providing a death benefit that decreases alongside the mortgage balance, ensuring that the client's financial responsibilities are met without excess coverage. This tailored approach offers peace of mind while maintaining cost-effectiveness.

Decreasing term policy.

Related Questions

Related Quizzes

How familiar were you with this question?

Report an Issue

Rate this Practice Test