Credit Insurance Limited Lines Practice Test

Credit life insurance pays off the outstanding loan balance if the borrower dies. Credit disability insurance (also known as credit accident and health) makes monthly loan payments on the borrower's behalf for a specified period if they become totally disabled as defined by the policy. They are distinct coverages, often sold separately or together as a package.

Premiums are most commonly calculated using the single premium method, where a one-time premium is charged based on the initial loan amount and term, often financed into the loan itself. Alternatively, the monthly outstanding balance method charges a monthly premium based on the remaining loan balance. State laws heavily regulate the rates and methods used.

Insurers must file their credit insurance policy forms, rates, and rules with the state insurance department for approval before they can be sold. You, as an agent, must ensure you are only selling approved products. Selling an unapproved form is a serious violation.

Federal and state laws strictly prohibit tying the extension of credit to the purchase of insurance. You must provide clear, written disclosure to the borrower that the purchase of credit insurance is not required to obtain the loan and that they may choose a different insurer (if permitted by the creditor). This disclosure often requires a separate, signed acknowledgment.

The borrower is generally entitled to a refund of the unearned premium. For single premium policies, state-specific refund formulas (like the Rule of 78s or the Pro Rata method) dictate the calculation. You must understand these methods to explain refunds accurately and ensure compliance.