New Jersey Life Producer Practice Exam

When a credit life insurance policy is terminated prior to the loan maturity date, who receives a refund of unearned premiums?

1. The debtor

2. The insured

3. The creditor

4. The insured's estate

The correct answer is: The creditor

In the context of credit life insurance, when a policy is terminated prior to the loan maturity date, it is typically the creditor who receives a refund of unearned premiums. This is because credit life insurance is designed to pay off a borrower's debt to a lender in the event of the borrower's death. Therefore, when the policy is terminated, any unearned premiums that were paid are returned to the party who stands to benefit from the policy's coverage, which is the creditor. The rationale behind this is tied to the nature of credit life insurance, where the creditor is the entity at risk in the event of the debtor's death. Thus, they are entitled to any refunds that occur due to cancellation or early termination of the policy. This setup helps protect the lender's interests while ensuring that the debtor’s obligation can be met even in unforeseen circumstances.