New Jersey Life Producer Practice Exam

Credit life insurance is categorized as which type of plan?

1. Qualified plan

2. Government-sponsored plan

3. Non-qualified plan

4. Employer-sponsored plan

The correct answer is: Non-qualified plan

Credit life insurance is categorized as a non-qualified plan because it is typically designed to pay off a specific debt in the event of the borrower's death, rather than fulfilling the requirements of a qualified retirement plan that offers tax benefits under IRS rules. Non-qualified plans do not adhere to the same regulatory standards as qualified plans, which are often subject to contribution limits and other formalities. Credit life insurance is specifically aimed at providing financial security for lenders, ensuring that the outstanding debt can be settled without imposing financial strain on the borrower's beneficiaries. Unlike qualified plans, such as traditional IRAs or 401(k)s, credit life insurance does not have tax-deferred growth features or require pre-defined contributions leading to tax advantages. Additionally, these plans are not organized or regulated under ERISA, further confirming their status as non-qualified. By understanding that credit life insurance serves a distinct purpose fundamentally separate from retirement and employer-sponsored plans, one can better appreciate its classification within insurance and financial products.