What type of policy is most commonly used in credit life insurance?

What type of policy is most commonly used in credit life insurance?

• A. Whole life insurance
• B. Decreasing term insurance
• C. Universal life insurance
• D. Variable life insurance

Answer: (B)

Decreasing term insurance is commonly used in credit life insurance due to its design and purpose. This type of policy provides coverage that decreases over time, which aligns well with the nature of many types of debt. As the borrower pays down their loan, the amount of coverage necessary to pay off that loan also decreases. Credit life insurance is typically intended to cover a specific debt such as a mortgage or an auto loan, so the decreasing term structure is ideal. In the unfortunate event of the borrower's death, the insurance benefit paid out aligns with the remaining balance of the loan, ensuring that the lender is compensated without requiring the insured to have more coverage than necessary as the debt diminishes. Whole life insurance, universal life insurance, and variable life insurance do not meet the specific needs and characteristics required for credit life insurance because they provide level benefits or have more complex structures that do not decrease in conjunction with a debt repayment schedule. This makes decreasing term insurance the most suitable and widely adopted option for credit life scenarios.

Decreasing term insurance is commonly used in credit life insurance due to its design and purpose. This type of policy provides coverage that decreases over time, which aligns well with the nature of many types of debt. As the borrower pays down their loan, the amount of coverage necessary to pay off that loan also decreases.

Credit life insurance is typically intended to cover a specific debt such as a mortgage or an auto loan, so the decreasing term structure is ideal. In the unfortunate event of the borrower's death, the insurance benefit paid out aligns with the remaining balance of the loan, ensuring that the lender is compensated without requiring the insured to have more coverage than necessary as the debt diminishes.

Whole life insurance, universal life insurance, and variable life insurance do not meet the specific needs and characteristics required for credit life insurance because they provide level benefits or have more complex structures that do not decrease in conjunction with a debt repayment schedule. This makes decreasing term insurance the most suitable and widely adopted option for credit life scenarios.