AFIP Insurance Product Knowledge 3 — Questions and Answers
Question 1: A customer finances a vehicle and purchases Credit Life insurance. What does Credit Life insurance pay upon the insured borrower's death?
- A lump sum equal to the vehicle's current market value paid to the customer's estate
- The outstanding loan balance, paid directly to the lending institution (Correct answer)
- Funeral and burial expenses up to a policy limit
- Monthly loan payments for up to 12 months while the estate is settled
Correct answer: The outstanding loan balance, paid directly to the lending institution
Credit Life insurance pays off the remaining loan balance to the lender upon the borrower's death, protecting the co-signer and estate from the debt.
Question 2: Which of the following is an example of an 'exclusionary' (bumper-to-bumper) VSC coverage approach?
- Only the components listed in the contract schedule are covered
- All mechanical and electrical components are covered except those specifically listed as excluded (Correct answer)
- Coverage applies only to powertrain components such as engine and transmission
- The contract covers only parts that fail due to manufacturer defect
Correct answer: All mechanical and electrical components are covered except those specifically listed as excluded
An exclusionary contract covers everything except items explicitly listed as excluded, making it the broadest form of VSC coverage.
Question 3: A finance manager presents Credit Disability Insurance to a customer. What event triggers a benefit payment under this coverage?
- The customer's vehicle is disabled due to a mechanical breakdown
- The customer becomes temporarily or permanently disabled and cannot make loan payments (Correct answer)
- The customer loses their job involuntarily
- The customer is hospitalized for more than 30 consecutive days
Correct answer: The customer becomes temporarily or permanently disabled and cannot make loan payments
Credit Disability (Accident & Health) insurance makes loan payments on the customer's behalf when the insured borrower is disabled and unable to work.
Question 4: Under the FTC's Credit Practices Rule, which practice is prohibited when selling credit insurance in connection with a vehicle loan?
- Offering credit insurance at the time of loan closing
- Requiring credit insurance as a condition of loan approval (Correct answer)
- Disclosing the monthly premium cost to the customer
- Including credit insurance in the payment quote if the customer requests it
Correct answer: Requiring credit insurance as a condition of loan approval
The FTC Credit Practices Rule prohibits conditioning loan approval on the purchase of credit insurance, as this is considered an unfair or deceptive act.
Question 5: A Paintless Dent Repair (PDR) protection product typically covers which of the following?
- Deep scratches that penetrate through the clear coat and primer
- Minor dents and dings from parking lot incidents where paint is undamaged (Correct answer)
- Hail damage requiring panel replacement
- Collision damage covered under the customer's auto policy
Correct answer: Minor dents and dings from parking lot incidents where paint is undamaged
PDR protection covers minor dents and dings where the paint surface is intact and can be repaired without repainting using the paintless technique.
Question 6: What is 'pro-rata' cancellation of a VSC, and how does it differ from '90-day' or 'short-rate' cancellation?
- Pro-rata returns the exact unused portion of the premium; short-rate applies a penalty, returning less than the unused portion (Correct answer)
- Pro-rata applies a cancellation fee; short-rate returns the full unused premium with no penalty
- Pro-rata is used only when the vehicle is sold; short-rate applies when the customer voluntarily cancels
- Both methods return identical amounts; the terms are interchangeable
Correct answer: Pro-rata returns the exact unused portion of the premium; short-rate applies a penalty, returning less than the unused portion
Pro-rata cancellation refunds the exact proportional unused premium, while short-rate cancellation includes a penalty that reduces the refund amount.
Question 7: Which federal law requires that the cost of single-premium credit insurance be included in the calculation of the Annual Percentage Rate (APR) disclosed to the borrower?
- The Equal Credit Opportunity Act (ECOA)
- Regulation Z / Truth in Lending Act (TILA) (Correct answer)
- The Gramm-Leach-Bliley Act (GLBA)
- The Fair Credit Reporting Act (FCRA)
Correct answer: Regulation Z / Truth in Lending Act (TILA)
Regulation Z under TILA requires that single-premium credit insurance financed into the loan be included in the finance charge and reflected in the disclosed APR.
AFIP Insurance Product Knowledge 3
A customer finances a vehicle and purchases Credit Life insurance.
What does Credit Life insurance pay upon the insured borrower's death?