Which statement describes a Decreasing Term policy in loan protection because the debt declines over time?

Which statement describes a Decreasing Term policy in loan protection because the debt declines over time?

• A. Remains level throughout term
• B. Increases as the loan balance decreases
• C. Decreases in step with outstanding loan balance
• D. Fluctuates with interest rates

Answer: (C)

The key idea is that loan protection using decreasing term keeps the death benefit aligned with the outstanding debt. As the loan is paid down, the amount the policy would pay out also decreases, so the benefit matches the remaining balance you’d want to cover. This makes the protection efficient: if the insured dies, the payout is enough to payoff the remaining loan, but not more than that as time goes on. In practice, premiums for this type of policy are usually level, while the benefit declines with time. This differs from a level term policy, where the payout stays the same throughout the term, an increasing term policy where the payout grows, or a policy that fluctuates with interest rates, which isn’t typical for standard loan protection.

The key idea is that loan protection using decreasing term keeps the death benefit aligned with the outstanding debt. As the loan is paid down, the amount the policy would pay out also decreases, so the benefit matches the remaining balance you’d want to cover. This makes the protection efficient: if the insured dies, the payout is enough to payoff the remaining loan, but not more than that as time goes on. In practice, premiums for this type of policy are usually level, while the benefit declines with time. This differs from a level term policy, where the payout stays the same throughout the term, an increasing term policy where the payout grows, or a policy that fluctuates with interest rates, which isn’t typical for standard loan protection.