Credit Life Insurance

Marcus Oyelaran finances a $28,000 auto loan and the dealer's lender enrolls him in coverage tied to the loan. If Marcus dies while the balance is outstanding, credit life insurance:

1. A.Builds cash valueThis is temporary protection tied to a loan balance, with nothing set aside to accumulate. The premium goes toward covering the debt rather than building an asset.
2. B.Pays the family a lump sum with no loanThe proceeds go to the lender to extinguish the balance rather than to the family as free cash. The benefit is that the debt disappears, not that survivors collect a windfall.
3. C.Pays the loan balance to the creditor if the insured diesCorrect - it protects the lender/loan.
4. D.Covers only accidentsThis coverage responds to the borrower's death regardless of cause. Narrowing it to accidents would describe a very different and much thinner product.

Why: Credit life pays the outstanding balance of a loan to the creditor if the insured borrower dies.

A borrower buys credit life insurance in connection with an $18,000 auto loan. As the loan is paid down, the insurance coverage:

1. A.Converts automatically to whole life once the loan is repaidWhen the debt ends, credit life simply terminates - there is nothing left to insure and no conversion feature.
2. B.Remains level at $18,000, with any excess paid to the borrower's estateThis describes level term - credit life is capped at the debt, so no excess ever exists to pay an estate.
3. C.Decreases along with the outstanding loan balance and may not exceed the debtCorrect. Credit life is decreasing coverage matched to the remaining balance, with the creditor as beneficiary.
4. D.Increases as interest accrues on the loanCoverage follows the amortizing (shrinking) balance - it never grows with interest charges.

Why: Credit life exists solely to retire the debt if the borrower dies, so the benefit tracks the declining loan balance - typically written as decreasing term. Coverage may not exceed the amount of the outstanding debt.

A finance company requires borrowers to carry CREDIT LIFE insurance on their installment loans. Which statement about this coverage is correct?

1. A.Coverage must be level term for the original loan amountWrong. Decreasing term tracking the balance is the standard design.
2. B.Coverage is limited to the loan balance, and the borrower may buy it from any insurerCorrect. Debt-capped benefits and free choice of insurer are the statutory protections.
3. C.The borrower's family receives the face amount at his deathWrong. The CREDITOR is the beneficiary, up to the balance owed.
4. D.The lender may require purchase through its captive insurer onlyWrong-but-tempting. Requiring INSURANCE is lawful; requiring a PARTICULAR insurer is coercive and prohibited.

Why: Credit life pays the outstanding loan balance to the creditor at the debtor's death, usually as decreasing term matched to the amortization; lenders may require coverage but must allow the borrower to obtain it from an insurer of his choice. Citation: state credit insurance statutes (NAIC model). Takeaway: creditor-beneficiary, debt-limited, borrower's choice of insurer.