What is a residual debt insurance?
A residual debt insurance secures the borrower and his family members from a debt-free insolvency. If the borrower is no longer able to settle the loan due due to unemployment, incapacity, divorce or death, a residual debt insurance will cover the outstanding payments. It is recommended by credit institutions with the completion of installment loans, car and mortgage lending and loans. An understandable procedure – the residual debt insurance protects not only the borrower in case of cases, but also the loan issuing bank from payment defaults. But how useful is a residual debt insurance really?
Pay attention to the scope of services
The scope of services varies from insurer to insurer. Often the policyholder can choose between different options.
Option 1: The insurance only applies in the event of death.
Option 2: The policyholder is insured against incapacity and death.
Option 3 : Comprehensive insurance cover for unemployment, incapacity, divorce and death.
Insurance cover exists for the duration of the repayment term. But beware: When taking out a residual debt insurance, it must be taken into account that contractually stipulated waiting and waiting periods as well as performance limits and exclusions preclude immediate and comprehensive protection. For example, the residual debt insurance usually only provides for unemployment if it occurs at the earliest three months after the start of the contract and additionally a three-month waiting period has been observed. Unemployment benefits are usually limited to 18 months. The following overview shows common performance limitations and exclusions:
|case of insurance||scope||Waiting time 1 / waiting period 2||Exclusions 3|
|death||Payment of the agreed sum insured or payment of outstanding installments||– / –||Disclaimer|
|unemployment||Assumption of the rates for max. 18 months||1-6 months / 3 months||Intentional induction, for example by arbitrary dismissal|
|incapacity for work||Takeover of the remaining installments||– / 6 weeks||Disclaimer|
|divorce||One time payment in contractually agreed amount after final divorce||3 months / –||No benefits in case of insurance completion in the year of separation|
1 Waiting period: Period between the start of the contract and the beginning of the insurance cover.
2 Waiting period: Period between insured event and commencement of service.
3 Exclusion clause: The insurer’s obligation to pay is waived if the insured event occurs within two years after commencement of the insurance and is related to a previous illness which has been medically advised or treated within the last twelve months prior to commencement of the insurance.
In addition, the conclusion of a residual debt insurance and the resulting benefit entitlement is often only up to a certain age possible.
Check existing insurance and repayment term
Check existing insurance cover
A residual debt insurance is essentially a term life insurance. If insurance cover already exists for accident, occupational disability or term life insurance, residual debt insurance is usually unnecessary, especially since the costs for the insurance mentioned are significantly lower. It is therefore worthwhile to check in advance the scope of services of existing insurance before the decision for or against a residual debt insurance is taken.
The relationship between repayment term and borrowing costs must be right
The cost of a residual debt insurance depends on the extent of the insured risk, on the one hand, and on the loan term and the amount of the loan, on the other hand. Especially for installment loans with a low loan amount and repayment period, the conclusion of a residual debt insurance is associated with a huge increase in costs, which is usually out of all proportion to the insured risk.
With the loan calculator to the appropriate installment loan
However, if you want to take on a high loan amount or plan a construction loan or real estate financing that has to be repaid over many years or even decades, you should consider taking out a residual debt insurance. The likelihood that an insured event will arrive within a long repayment term is many times higher than for short repayment periods.
Get a non-binding building loan offer
Remaining debt insurance rarely a loan requirement
Banks are happy to point out the advantages of a residual debt insurance and often give the prospective buyer the feeling that the insurance coverage has a direct influence on the lending. The fact is that the conclusion of a residual debt insurance is mandatory only in exceptional cases. As banks often receive commissions to broker insurance, they still have a heightened interest in “selling off” the insurance, and premature insurance policies can be revoked or terminated at any time within 30 days of the contract being signed.
Conclusion: Basically, the decision for or against a residual debt insurance should be made dependent on the duration of the repayment term and the individual living conditions, such as job security. Ask yourself what risk you want to insure and how likely it is that an insurance event will occur. Examine existing insurances to what extent these potential risks are already hedged. Also, compare the terms and conditions (including qualifying and waiting times, age restrictions, disclaimer) of different insurers or even if the credit issuing institution recommends you a particular insurance company.