A loan applicant is required by their lender to purchase a type of insurance that will pay off the outstanding loan balance if the applicant dies or becomes totally disabled. This ensures the lender is protected from default due to these specific events. What type of insurance is this?
- ACredit Life Insurance
- BMortgage Protection Insurance
- CAccidental Death & Dismemberment
- DDisability Income Insurance
Show answer & explanationAnswer & explanation
Correct answer: A. Credit Life Insurance
Credit Life Insurance and Credit Disability Insurance (often combined or offered as part of 'Credit Insurance') are designed to pay off a specific loan balance if the insured borrower dies or becomes disabled, protecting the lender. Mortgage Protection Insurance is a specific type of life insurance used for mortgages, but 'Credit Life Insurance' is the broader and more precise term for covering any loan in the event of death, and when combined with disability, it falls under the umbrella of Credit Insurance.
Why the other options are wrong
- B. Mortgage Protection Insurance is a form of credit insurance specific to mortgages, but Credit Life Insurance is a more general term that covers the death aspect of the loan, and the question implies both death and disability protection for a 'loan applicant'. The broader category of Credit Insurance encompasses both Credit Life and Credit Disability.
- C. AD&D only covers specific accidental death or dismemberment, not typically natural death or total disability for loan repayment, nor does it pay off a loan directly.
- D. Disability Income Insurance replaces lost income, it does not directly pay off a loan balance to a lender.
Credit Insurance
A type of insurance that protects a lender by paying off the outstanding balance of a loan in the event of the borrower's death, disability, or in some cases, involuntary unemployment.
- Benefit amount decreases as the loan balance decreases.
- Often purchased through the lender.
- Can include credit life, credit disability, and credit unemployment insurance.
Memory trick: Loan's safe, even if health fails!