Arizona Life and Health Practice Exam

Which statement is true about a decreasing term life policy?

1. The face amount increases over the policy period

2. The face amount is fixed and does not change

3. The face amount decreases over the policy period

4. The policy provides a cash value component

The correct answer is: The face amount decreases over the policy period

A decreasing term life policy is specifically designed such that the face amount, or the death benefit, decreases over the policy's duration. This feature makes it distinct from other types of life insurance policies. Typically, a decreasing term policy is structured to align with specific financial obligations that diminish over time, such as a mortgage or a loan. As these obligations reduce, the death benefit reflects this decrease, providing a range of benefits that correspond with the insured's changing financial responsibilities. In contrast, the other statements do not accurately describe the nature of a decreasing term life policy. The face amount does not increase over time, nor is it fixed without change; it specifically decreases. Additionally, a decreasing term life policy does not have a cash value component, as it is pure insurance protection for a specified term without any savings or investment feature. Thus, the defining characteristic of a decreasing term policy is the reduction of the face amount as the policy period progresses.