PSI Life Exam Practice Test

Which type of insurance is the most cost-effective option to pay off a 30-year mortgage?

1. Whole life insurance

2. Level term insurance

3. Universal life insurance

4. Decreasing term life insurance

The correct answer is: Decreasing term life insurance

Decreasing term life insurance is particularly well-suited for paying off a mortgage because its death benefit decreases over time, typically aligning with the amortization schedule of a mortgage. As you make mortgage payments, the outstanding balance owed reduces, which corresponds with the decreasing coverage amount of this type of insurance. This structure makes decreasing term insurance generally more affordable than whole life or universal life policies, which offer permanent coverage and build cash value, leading to higher premiums. Level term insurance, while providing a constant death benefit, does not account for the decreasing needs associated with a mortgage, thus might present unnecessary coverage (and cost) as the mortgage balance shrinks. Therefore, for those specifically looking to cover a mortgage liability effectively while minimizing costs, decreasing term life insurance stands out as the optimal choice.