New Jersey Life Producer Practice Exam

What amount of unearned premium refund is typically paid to the creditor in credit life insurance?

1. 50% of the policy

2. 100% of the policy

3. Pro-rated amount

4. No refund

The correct answer is: Pro-rated amount

In credit life insurance, the unearned premium refund is typically calculated on a pro-rata basis. This means that the refund amount is determined by the portion of the policy coverage that has not been utilized. When a borrower pays for credit life insurance, they are paying for coverage that extends over a specific term. If the loan is paid off early or the borrower passes away, the portion of the premium that corresponds to the remaining coverage period is refunded. Using a pro-rated calculation allows for a fair and equitable return of the premium based on how much insurance coverage was actually used compared to what was initially paid for. This approach ensures that the creditor receives a refund amount that corresponds to the unused insurance, aligning with established practices in the insurance industry. In summary, a pro-rated amount for the unearned premium refund is consistent with how premiums are typically structured and administered, ensuring that borrowers and creditors are treated fairly regarding any unutilized insurance coverage.