New Jersey Life and Health State Practice Exam

Which type of life insurance is typically used to cover debts in the event of the debtor's death?

1. Whole Life Insurance

2. Term Life Insurance

3. Universal Life Insurance

4. Group Term Life Insurance

The correct answer is: Group Term Life Insurance

The most fitting choice for covering debts upon a debtor's death is term life insurance. This type of insurance is specifically designed to provide a death benefit for a specified period, often aligning with the duration of outstanding debts, such as a mortgage or a loan. Because term life insurance is generally less expensive than permanent types of life insurance, it allows individuals to secure coverage that would be sufficient to pay off debts without incurring high premiums, making it an effective financial planning tool for individuals concerned about their financial obligations. While whole life insurance offers lifetime coverage and can accumulate cash value, it is typically more expensive and not structured specifically for debt coverage. Universal life insurance shares characteristics with whole life but includes more flexibility in premium payments and death benefit amounts, yet it still does not have the primary focus on debt coverage during a defined term. Group term life insurance is often provided through employers and may cover multiple employees; however, it may not be directly tied to an individual's debts. In contrast, in a one-on-one situation where an individual’s primary concern is to ensure debts are settled in the event of death, term life insurance stands out as the most appropriate option.