New Jersey Life Producer Practice Exam

What is the term for a credit life insurance policy where the benefits decrease as the debt is paid down?

1. Static term

2. Level term

3. Decreasing term

4. Increasing term

The correct answer is: Decreasing term

A credit life insurance policy where the benefits decrease as the debt is paid down is known as a decreasing term policy. This type of policy is specifically designed to protect creditors by ensuring that the life insurance benefit correlates with the outstanding debt. As the insured makes payments on the debt or as the term of the loan progresses, the amount of insurance decreases in tandem with the remaining balance owed. This structure ensures that should the policyholder pass away, the benefit paid out will cover the remaining debt, providing peace of mind to both the insured and the lender. In contrast, other types of term insurance such as static or level term maintain a consistent payout throughout the life of the policy, and increasing term policies offer progressively higher benefits over time, which does not match the financing needs associated with a decreasing debt. Thus, the term "decreasing term" accurately describes the function and benefit structure of credit life insurance in this context.