All of the following are true of credit life EXCEPT
A. The creditor is the policyowner.
B. The insured names the beneficiary.
C. The death benefit cannot exceed the amount of the loan.
D. The premium payment is included in the loan payment.
The Correct Answer and Explanation is:
The correct answer is B. The insured names the beneficiary.
Explanation:
Credit life insurance is a type of life insurance policy designed to pay off a borrower’s debt in the event of their death. The main purpose of credit life insurance is to ensure that the loan balance is settled upon the borrower’s death, preventing any financial burden on the borrower’s estate or family. However, it differs from traditional life insurance in several key ways:
- A. The creditor is the policyowner.
This is true. In credit life insurance, the creditor (the lender or financial institution) is typically the policyowner and the beneficiary. This means that the creditor controls the policy, not the insured. The creditor purchases the policy to cover the loan balance, ensuring that the loan will be repaid if the borrower dies. The borrower is the insured, but they do not own the policy. - B. The insured names the beneficiary.
This statement is false and the correct answer. In credit life insurance, the borrower (the insured) does not name the beneficiary. The creditor (the lender) is the beneficiary of the policy. If the borrower dies, the creditor receives the death benefit to pay off the outstanding loan balance. The borrower does not have control over the beneficiary designation, as the purpose of the policy is to protect the creditor, not the borrower’s family. - C. The death benefit cannot exceed the amount of the loan.
This is true. The death benefit in credit life insurance is typically designed to match the loan amount. It will never exceed the balance of the loan, as the purpose is to cover the debt in full. Once the debt is paid, there is no additional benefit to the beneficiary since the loan is settled. - D. The premium payment is included in the loan payment.
This is true. In many cases, the premium for credit life insurance is included in the monthly loan payments. The borrower does not pay for the insurance separately but rather has it embedded in their regular loan repayment. This can make it easier for the borrower to manage but means the borrower is effectively paying for the insurance through the loan’s interest rate and terms.
Thus, the main point to remember is that credit life insurance does not allow the borrower to designate a beneficiary; the creditor is the beneficiary.