State RegulationsNJ specificDifficulty 2/5
A lender tells a loan applicant that her application will be approved only if she also buys credit life insurance from the lender's affiliated insurer. What is wrong with this under New Jersey insurance rules administered by the Department of Banking and Insurance?
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Answer & full 3-part explanation (select an option above, or peek)
Why C is correct
Credit life insurance in New Jersey is voluntary coverage: the debtor decides whether to buy it, and a lender may not make the insurance a condition of extending credit. Tying loan approval to the purchase — especially from an affiliated insurer — improperly converts an optional product into a forced sale. The New Jersey Department of Banking and Insurance supervises this market and treats coerced credit insurance purchases as an abuse of the lending relationship. Applicants remain free to decline the coverage and proceed with the loan itself.
Why the other options are wrong
- A) Credit life is not mandatory on installment loans; no state rule compels a borrower to buy it as a loan condition.
- B) Conditioning approval on the purchase defeats the voluntary character of the product, regardless of which insurer would write it.
- D) Requiring a different credit-related product does not cure the problem; the violation is making any insurance a condition of the loan.
Memory hook
Loan yes, insurance optional: a lender may not sell coverage at the approval gate.