State RegulationsNJ specificDifficulty 2/5
A borrower takes out a five-year installment loan and buys credit life coverage to go with it. As she makes her monthly payments over the life of the loan, what happens to her credit life benefit?
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Answer & full 3-part explanation (select an option above, or peek)
Why D is correct
Credit life insurance is written as decreasing term coverage matched to the amortization of the loan. With each payment the borrower retires part of the debt, and the death benefit shrinks along with the outstanding balance, because the policy exists only to pay off what is still owed. This linkage keeps the cost of the coverage proportionate to the exposure. Credit life marketing and design in New Jersey are subject to the oversight of the New Jersey Department of Banking and Insurance.
Why the other options are wrong
- A) An increasing benefit would over-insure a shrinking debt; the coverage decreases, it never grows with the loan.
- B) Credit life does not convert into permanent coverage at loan maturity; the coverage ends when the debt is retired.
- C) A level benefit describes level term insurance, not credit life, whose benefit is keyed to the declining loan balance.
Memory hook
Loan shrinks, benefit shrinks: credit life is decreasing term wearing a lender's badge.