New Jersey Life Producer Law Practice Test

In which forms can credit life insurance be issued to a borrower?

1. Term life insurance

2. Whole life insurance

3. Group whole life insurance

4. Group term life

The correct answer is: Term life insurance

Credit life insurance is primarily designed to pay off a borrower's debt in the event of their death. The purpose is to ensure that outstanding loans, such as mortgages or auto loans, are settled without burdening the borrower's estate or dependents. Term life insurance is the most commonly used form for credit life insurance because it provides coverage for a specific period that aligns with the duration of the borrower’s loan. If the borrower dies within that term, the policy pays a benefit directly to the lender to satisfy the debt. Since most loans have a finite term, this structure matches well with the needs of lenders and borrowers alike. While whole life insurance and group whole life insurance could technically be used, they are less practical for credit life insurance purposes due to their higher costs and the lifelong coverage they provide, which doesn't align with the temporary need of covering a specific debt. Group term life, although related, typically covers a group of individuals and may not cater specifically to the individual borrower’s debt needs like term life insurance does. Thus, term life insurance stands out as the appropriate form for issuing credit life insurance to borrowers, making it the correct answer.