New Jersey Life Producer Practice Exam

In credit life insurance, what type of term insurance is typically used?

1. Whole life

2. Level term

3. Decreasing term

4. Universal life

The correct answer is: Decreasing term

In credit life insurance, the type of term insurance that is typically used is decreasing term insurance. This type of policy is designed to cover a specific debt, such as a loan or mortgage, where the amount of coverage decreases over time as the outstanding balance of the debt is paid down. The purpose of credit life insurance is to ensure that if the insured individual passes away, the insurance proceeds can be used to pay off the remaining balance of the debt, alleviating financial strain on the borrower's family or estate. The correlation between the insurance benefit and the decreasing debt is what makes decreasing term insurance the most suitable choice for credit life insurance, as the coverage directly aligns with the debt obligation. In contrast, whole life insurance and universal life insurance provide a level benefit that does not decrease and involves a savings component, making them inappropriate for the purpose of covering a diminishing debt. Level term insurance, while it does provide a consistent coverage amount, does not accommodate the structure of a loan repayment where the outstanding balance decreases over time. Thus, decreasing term insurance is purposefully designed for such scenarios, making it the correct choice in the context of credit life insurance.