What is the purpose of a credit disability insurance policy?
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Credit disability insurance is a limited policy that protects a specific debt: if the insured debtor becomes disabled and unable to work, the insurer makes the periodic loan payments, typically up to a stated maximum period, on the debtor's behalf. The lending institution is usually a beneficiary of the benefit, but the purpose is to keep the loan current during disability so the debtor's credit and the lender's collateral are both protected. It is sold in connection with loans such as auto loans and credit cards and is a limited-benefit product, distinct from general disability income insurance.
Why the other options are wrong
- B) Paying off the remaining loan balance at death is the function of credit life insurance; credit disability instead makes the ongoing loan payments while the debtor is disabled.
- C) Credit disability benefits are applied to the loan payments, not paid to the family as general income; the benefit is earmarked for the debt obligation.
- D) The policy is triggered only by the debtor's disability, not by loan default from any cause; a default unrelated to disability does not produce benefits.
Memory hook
Credit disability = the insurer makes the car payment while you are laid up. The loan is the beneficiary.