How does a decreasing term insurance policy affect coverage and premiums?

A decreasing term insurance policy is designed to provide a death benefit that decreases over time, typically aligned with a specific financial obligation, such as a mortgage or a loan, which also decreases over time. In this policy, while the death benefit diminishes gradually throughout the term of coverage, the premium generally remains level.

This structure is particularly useful for individuals who have decreasing debts and want to ensure that their beneficiaries can pay off these liabilities. The primary appeal of this type of insurance is its cost-effectiveness; since the risk decreases as the coverage amount diminishes, the level premium charged can be lower compared to other types of term insurance.

Thus, the scenario presented in the correct answer accurately reflects that the coverage decreases while the premium remains stable throughout the life of the policy. This makes it an attractive option for policyholders who require declining coverage paired with predictable premium payments.