Residual debt insurance has many melodious names: credit default insurance, installment protection insurance, loan protection, letter of protection, security package, wellness package, to name just a few.
Who should feel comfortable or protected with such insurance? It is primarily the lenders who sell such products.
In addition, they receive additional security against loan defaults – in addition to an assignment of salary, the signing of the loan contract by another person or a real estate registration.
You earn final commissions and not too little
From the borrower’s point of view, such life insurance policies are not sensible in the vast majority of cases.
If you calculate the actual costs with a sharp pencil, you will no longer feel very comfortable.
Installment protection insurance is disproportionately expensive, and insurance coverage leaves a lot to be desired.
Summary and tips
Below are some tips and information on credit default insurance. It should not be forgotten that we are extremely negative about residual debt insurance.
This subjective view may not leave further statements and recommendations unaffected.
- In our opinion, residual debt insurance is never necessary for consumer loans with medium terms up to 84 months.
- Car loans that are specifically earmarked for special purposes do not require any additional expensive security packages because the vehicle is assigned as security when the letter is handed over.
- For loans over large amounts, perhaps from 50,000 dollars, and real estate financing, credit default insurance may make sense in individual cases if there is a particular risk situation. Example: a young family with children and a single earner finances a home. But even in these cases, there are more sensible alternatives.
- Credit default insurance does not fundamentally improve the credit score. If they are made indispensable for the conclusion of a loan, the bank should be changed (exception: certain forms of mortgage lending). Residual debt insurance as a mandatory prerequisite for lending can also be a sign of excessive economic demands.
- In principle, even with large amounts of credit, life insurance and possibly disability insurance or accident insurance are sufficient. In any case, avoid double insurance coverage with double costs. Existing insurance policies can be used.
- Never take out new risk insurance through the lending bank, but by comparison regardless of the lending business.
- However, life insurance, disability insurance, and accident insurance do not cover every risk that can make it difficult to repay a loan. Protection against unemployment and certain illnesses is only available with credit default insurance, but protection is often inadequate.
- Residual debt insurance is not standardized. Take a close look at the insurance conditions before taking out the insurance. Pay attention not only to the scope of the insured risks but also to waiting times, waiting for periods and liability exclusions, as well as the termination regulations.
- With residual debt insurance, only the remaining debt should actually be covered. This is only possible with an annuistically falling sum insured. Credit default insurance with linearly falling insurance sums poses the risk of under or over insurance.
- Check carefully the additional costs that are incurred by the residual debt insurance. Almost all credit providers are free to take out credit default insurance. The premiums and agency fees are then not included in the APR. Only if the credit contract does not come about without the default insurance, so the insurance is mandatory, must the costs be taken into account in the annual percentage rate (more under “Costs”).
- Are you a contract partner of the insurance company or are you only an insured person? In the case of group contracts, the bank is often the policyholder, and the customers are only the insured, and not the contractual partner. This creates disadvantages for borrowers, for example in terms of termination rights.
- Be careful when taking out a loan through comparison portals. Many online loan comparisons are by default residual debt insurance. If you want to do it without it, you have to remove this option.
- Are there any advantages? Not really. Supporters of residual debt insurance consider it an advantage that a health check is not required.
- Last but not least: there is no legal obligation to take out installment protection insurance. The conclusion always happens on a voluntary basis. And the offer of the lending bank never has to be accepted. Borrowers can insure themselves wherever they like.
What is residual debt insurance?
Credit default insurance is an extended risk life insurance taken out in connection with borrowing from the bank. If certain risks arise, the insurance company repays the loan either completely or for a certain period of time.
For example, if death occurs, the insurer fully compensates for the loan obligation.
In the case of temporary incapacity for work or unemployment, on the other hand, the credit installments are only taken over for the time of the prevention.
There is no mandatory standard for installment protection insurance. The contracts differ enormously in terms of insurance coverage and costs.