New Jersey Life Producer Practice Exam

Which type of insurance policy covers individuals through loans made to debtors?

1. Whole life insurance

2. Term insurance

3. Credit life insurance

4. Universal life insurance

The correct answer is: Credit life insurance

Credit life insurance is designed specifically to cover the debts of individuals in the event of their death. This type of policy pays off a borrower's outstanding loans, such as personal loans, credit card debts, or mortgages, directly to the lender. Essentially, it ensures that the debt does not become a financial burden on the borrower's family or estate. The concept behind credit life insurance lies in providing peace of mind to both the lender and the borrower. For lenders, it mitigates the risk of losing their investment due to a borrower's unexpected death. For borrowers, it secures their family's financial stability by ensuring debts are settled even in the unfortunate event of their passing. Whole life insurance, term insurance, and universal life insurance serve different purposes, primarily aimed at providing financial protection to beneficiaries rather than specifically addressing outstanding debts in the direct manner that credit life insurance does. Whole life insurance offers lifelong coverage with a cash value component, term insurance provides coverage for a specified period without any cash value, and universal life insurance combines a death benefit with a savings element that can fluctuate. However, none of these policies are tailored to cover debts in the same direct and immediate way that credit life insurance does.