South Carolina Life Insurance Practice Exam

Which statement is correct regarding credit life insurance?

1. It covers multiple lives under one policy

2. It insures the life of a debtor

3. It allows policyholders to receive dividends

4. It requires a physical exam for all applicants

The correct answer is: It insures the life of a debtor

Credit life insurance is a specialized form of insurance designed to pay off a borrower's debt in the event of their death. This insurance specifically insures the life of a debtor, ensuring that the outstanding balance of loans or credit obligations is settled upon their passing. This provides a safety net for lenders and can alleviate the financial burdens on family members who might otherwise be responsible for the debt. In contrast, some options suggest features not typically associated with credit life insurance. For example, covering multiple lives under one policy is not a standard characteristic of credit life; each policy is typically tied to an individual debtor's loan. Additionally, the notion of receiving dividends suggests a whole or universal life policy, which credit life does not offer, as it is usually term insurance without any investment elements. Lastly, credit life insurance does not universally require a physical exam; many policies are issued without medical underwriting to ensure accessibility for borrowers. Thus, the correct understanding of credit life insurance is encapsulated in the statement about insuring the life of a debtor, making it a crucial tool for managing financial obligations in the event of the policyholder's death.