New Jersey Life Producer Practice Exam

What is the maximum amount of coverage allowed under a Credit Life Policy?

1. Three times the debtor's income

2. Amount of indebtness

3. Ten thousand dollars

4. One million dollars

The correct answer is: Amount of indebtness

In the context of a Credit Life Policy, the maximum amount of coverage is typically aligned with the amount of indebtedness. This type of insurance is designed to pay off a borrower's debt in the event of their death, ensuring that the debt does not become a burden to their beneficiaries. By correlating the coverage to the amount of indebtedness, the policy serves its purpose of protecting both the lender's interests and the borrower's family. This arrangement helps ensure that the policy is appropriately tailored to the borrower's specific financial situation, allowing for sufficient coverage to clear the debt without overshooting or undershooting the necessary amount. Therefore, identifying the coverage limit as equal to the amount of indebtedness is crucial in understanding how credit life policies function within the greater framework of debt protection. Other options, such as coverage based on a multiple of the debtor's income or fixed monetary limits, do not accurately reflect the principle of credit life insurance, which is directly tied to the actual debt to be paid off upon the borrower's death.