6.2 Specialized Plans
Credit Life Insurance (Individual and Group)
Credit life insurance may be issued as individual coverage on the life of a debtor or as group insurance issued to a creditor that provides coverage on multiple debtors for the creditor's benefit. In most cases, this type of insurance is structured as decreasing term insurance, meaning the amount of coverage declines as the outstanding debt balance is reduced.
The debtor typically pays the premium, which is often included as part of the regular loan payment. A small portion of each payment is allocated toward the cost of the insurance. If the loan is paid off early or refinanced, the debtor generally has the right to cancel the coverage. Premiums are commonly calculated using a flat rate, and the insurance benefit cannot exceed the total outstanding indebtedness.
Coverage begins when the debtor becomes legally obligated to the creditor. The creditor is usually both the policyowner and beneficiary, and if the debtor dies while the coverage is in force, the insurance proceeds must be applied to satisfy the remaining loan balance.
Industrial (Home Service)
Individual policies of this type are commonly issued to lower-income individuals and typically do not require a medical examination. Premiums are usually collected weekly or monthly, either by an insurance agent who services the local area or through direct payment to the insurer.
These industrial life insurance policies generally have a small face amount, often $1,000 or less, and are designed primarily to help cover funeral and burial expenses. They are traditionally marketed door-to-door by a debit agent, also referred to as a home service agent. The policies usually include a four-week grace period, and upon the insured's death, the benefit is typically paid as a lump-sum settlement.
Facility of Payment Clause
This provision allows the insurer to pay the policy proceeds to a relative or another person the insurer considers entitled to receive the benefits if no beneficiary has been designated or if no beneficiary is living.
Quiz
1. What type of life insurance is most commonly used to protect a loan balance and decreases as the debt is repaid?
A. Whole life insurance
B. Credit life insurance
C. Industrial life insurance
D. Variable life insurance
Correct Answer: B
Rationale: Credit life insurance is typically structured as decreasing term insurance, meaning the amount of coverage declines as the loan balance is reduced. The purpose is to ensure the remaining debt is paid if the debtor dies.
2. Who is usually the policyowner and beneficiary of a credit life insurance policy?
A. The debtor
B. The debtor's family
C. The creditor
D. The insurance agent
Correct Answer: C
Rationale: In most credit life insurance arrangements, the creditor owns the policy and is the beneficiary. If the debtor dies, the insurance proceeds are used to pay off the remaining loan balance.
3. Which characteristic is commonly associated with industrial (home service) life insurance?
A. Large face amounts exceeding $100,000
B. Premiums paid annually only
C. Small face amounts designed to cover funeral expenses
D. Mandatory medical examinations
Correct Answer: C
Rationale: Industrial life insurance policies typically have small face amounts (often $1,000 or less) and are intended to help cover funeral and burial expenses. They are often sold to individuals with limited financial resources.
4. How are premiums typically collected for industrial life insurance policies?
A. Through payroll deduction only
B. Weekly or monthly collections by a debit agent or direct payment
C. Only by bank wire transfer
D. Once every five years
Correct Answer: B
Rationale: Industrial life policies are traditionally sold and serviced by debit agents (home service agents) who collect premiums weekly or monthly, although policyholders may also pay the insurer directly.
5. What is the purpose of the Facility of Payment Clause?
A. To allow the policyowner to borrow against the policy
B. To allow the insurer to pay proceeds to someone entitled if no beneficiary is named
C. To reduce premiums for low-income policyholders
D. To automatically increase the death benefit
Correct Answer: B
Rationale: The Facility of Payment Clause allows the insurer to pay policy proceeds to a relative or other appropriate person if no beneficiary has been designated or if no beneficiary is living. This helps ensure that benefits are distributed without unnecessary legal delays.