Maryland Life and Health Insurance License Practice Exam

What is the least expensive option to pay off a 30-year mortgage balance?

1. Whole life insurance

2. Decreasing term life insurance

3. Level term life insurance

4. Mortgage life insurance

The correct answer is: Decreasing term life insurance

Choosing decreasing term life insurance as the least expensive option to pay off a 30-year mortgage balance is a sound decision based on the nature of how this type of insurance works. Decreasing term life insurance provides coverage that diminishes over time, typically aligning with the amortization schedule of a mortgage. As the outstanding balance on the mortgage decreases, so does the death benefit provided by the policy. This kind of insurance is specifically designed to cover a decreasing obligation, which makes it a more cost-effective choice compared to whole life insurance or level term life insurance. Whole life insurance has a cash value component and extends coverage for the insured's entire lifetime, making it considerably more expensive. Level term life insurance offers a constant death benefit over the term of the policy, which does not correlate with the decreasing balance of a mortgage. Mortgage life insurance is designed to pay off a mortgage in the event of the borrower’s death, and while it can be tailored to mortgage balances, it often comes at a premium cost similar to level term insurance. Since decreasing term life insurance directly corresponds to the mortgage balance, it is structured to be more economical for this specific purpose, making it the most suitable choice for covering the mortgage over a 30-year term.