Tennessee Insurance Practice Exam

What type of coverage is typically associated with credit life insurance?

1. Whole Life Insurance

2. Term Life Insurance

3. Decreasing Term Coverage

4. Universal Life Insurance

The correct answer is: Decreasing Term Coverage

Credit life insurance is specifically designed to pay off a borrower's debt in the event of their death. The most common type of coverage associated with credit life insurance is decreasing term coverage. This is because as the borrower's outstanding debt decreases over time (for instance, as loan payments are made), the amount of life insurance coverage also decreases accordingly. Decreasing term coverage aligns with the needs of creditors and borrowers, ensuring that the death benefit paid will pay off the remaining loan balance at the time of death. Other types of coverage, such as whole life or universal life insurance, do not decrease in value over time and are typically intended for different purposes, such as long-term savings or permanent coverage. Therefore, the nature of decreasing term coverage is a perfect fit for the purpose of credit life insurance, which focuses on the repayment of loans upon death.