New Jersey Life Producer Law Practice Test

In a credit insurance policy, who is the beneficiary?

1. The creditor

2. The debtor

3. The insurance company

4. The state

The correct answer is: The creditor

In a credit insurance policy, the beneficiary is the creditor. This type of insurance is designed to protect lenders against the risk of non-payment from borrowers due to various circumstances, such as death or disability of the debtor. When a debtor falls behind or defaults on a loan, the insurance payout goes directly to the creditor, ensuring that the lender recoups some or all of their losses. This arrangement works because the creditor has a financial stake in the loan being repaid, and the insurance serves as a safeguard for that investment. While the debtor is the party who is insured under the policy, their role is primarily as the party whose risks the insurance policy addresses. The insurance company does not benefit directly from the policy in the same way; rather, it provides coverage in exchange for premiums and manages the risk associated with underwriting the insurance. The state does not typically have a role in the beneficiary designation in credit insurance policies. Thus, the creditor being the beneficiary aligns with the primary purpose and function of credit insurance.