Credit disability insurance is designed primarily to:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Credit disability insurance is a limited disability policy sold in connection with a loan or credit purchase. If the borrower becomes disabled, the policy pays the scheduled loan or credit payments, typically for a limited number of months and up to a maximum benefit, so the debt stays current. The benefit is tied to the outstanding balance and payment schedule, not to the borrower's income or the actual medical expense. Because the coverage is limited in amount and duration and attaches only to the debt, premiums are low. Credit disability is one of the named limited policies under the general concepts of medical and disability insurance (AH-II.3).
Why the other options are wrong
- B) Paying the borrower a lump sum equal to the full loan amount at loan inception would defeat the purpose of the coverage, because there would be no claim to trigger. Credit disability pays scheduled installments only when disability interrupts the borrower's ability to make payments.
- C) Protecting the lender against any default by the borrower for any reason would be a broader form of credit protection or credit insurance. Credit disability responds specifically to the borrower's disability and does not cover defaults caused by other events.
- D) Providing lifetime income replacement unrelated to the debt describes general disability income insurance, which replaces the insured's earnings. Credit disability benefits are tied to the loan's outstanding balance and payment schedule and end when the debt is satisfied.
Memory hook
Credit disability = the loan's payment bodyguard; it pays when the borrower can't.