What type of insurance protects against the default of a loan?

The correct choice is mortgage insurance, which is specifically designed to protect lenders against the risk of default on a loan secured by a mortgage. When a borrower takes out a mortgage to purchase a home, the lender often requires this type of insurance, especially if the borrower is making a down payment that is less than 20% of the home’s value. In the event that the borrower defaults and the lender suffers a loss, mortgage insurance helps to cover the lender's financial exposure.

This type of insurance allows lenders to offer loans to borrowers who may not have substantial equity built up in the property, thereby making it easier for individuals to purchase homes with lower down payments. Other types of insurance, such as life, health, or property insurance, serve different purposes and do not specifically address the risk associated with loan defaults. Life insurance covers the financial impact of the insured person's death, health insurance deals with medical costs, and property insurance protects physical assets from damage or loss.