New Jersey Life Producer Practice Exam

Under a Credit Life Policy, what is the maximum coverage amount allowed?

1. Equal to the outstanding loan amount

2. Set by the insurer at inception

3. Determined by the state regulators

4. Typically does not exceed twice the annual salary

The correct answer is: Equal to the outstanding loan amount

The maximum coverage amount under a Credit Life Policy is designed to align with the outstanding loan amount. This is because Credit Life Insurance is intended to pay off the debt in the event of the borrower's death, ensuring that the lender is repaid and that the borrower's estate or beneficiaries are not left with the financial burden of the debt. Therefore, the coverage precisely matches the amount owed on the loan when the policy is issued, providing a direct correlation between the insurance coverage and the financial obligation. This design ensures that the insurance is both relevant and adequate for the specific loan, offering protection tailored to the financial situation of the borrower. Generally, coverage that exceeds the loan amount would not be necessary or viable under typical regulatory parameters for these policies.