Why you shouldn’t take out one


Lerato Khumalo

Nobody wants to leave their heirs with debts. That’s why so-called residual debt insurance is often offered in loan agreements – but this policy is often not worth it. But there are alternatives.

The most important things at a glance

If you have ever bought a car or an expensive kitchen, you have probably been offered residual debt insurance. The promise: In the event of your death or unemployment, you don’t have to worry about the loan – the insurance will take over the remaining debt.

But this promise usually has one or two catches: the insurance is expensive and often the policies do not cover the debts. For whom is residual debt insurance worthwhile and what alternatives are there? t-online answers the most important questions.

You have a car accident, become seriously ill or your employer goes bankrupt: life can change suddenly, but you or your heirs still have to continue repaying a loan.

At this moment, a Residual debt insurance step in and take over the loan payments for a few months. It is a type of term life insurance and is often offered by the bank as part of a package with loan agreements.

Stiftung Warentest examined 25 insurance policies from banks. In the event of death, most policies keep their promise and pay off the loan. However, there are often extensive exclusion clauses in the contract terms.

Some residual debt insurance policies only pay

  • after expiry of a grace period or waiting period,
  • for limited periods,
  • up to an upper limit,
  • in the event of death, but not if people have killed themselves or if the death is due to a pre-existing illness.

Will you unable to workpayment morale is often poor. Insurance companies have built in a lot of leeway and high hurdles here. Similar to disability insurance, many banks only pay out in the event of an insurance claim if you are actually no longer able to do any other work than your current one. You therefore have to become very seriously ill for the insurance to take effect.

In the case of unemployment the auditors also rate the insurance companies poorly. If you become unemployed, it must not be your fault and payments will often stop if you slip into unemployment benefit II. You must also be aware that the residual debt insurance will not kick in if your fixed-term contract expires or if you have signed a termination agreement.

Good to know: The Federal Financial Supervisory Authority examines insurance figures in Germany every year. In 2019, insurance companies took over the loans in 5,000 cases. The data does not show how often insured people applied for the takeover. In total, almost a million people had an active policy that year.

Both Cost Stiftung Warentest has large price differences The cheapest insurance was available for 128 euros for a loan of over 10,000 euros. The most expensive residual debt insurance cost a whopping 2,280 euros.

Good to know: The bank does not usually include the cost of the insurance in the effective interest rate. The costs only have to be included if the bank will not grant a loan without this insurance.

One reason for the high prices is the Commissions for sellers. In some cases, these were 50 percent of the insurance premium. A new law is to limit these commissions to 2.5 percent of the loan amount from July 1, 2022. So if a seller pressures you to take out residual debt insurance, it is also because they make a lot of money from it.

The insurance is not mandatoryeven if a bank advisor puts pressure on you: Do not give in to it. Only get the loan agreement without additional insurance. It is better to accept different offers than to accept the combined offers. Compare residual debt insurance policies at your leisure.

Good to know: In the UK, payment protection insurance may only be sold one week after the loan has been taken out.

In most cases, insurance is unnecessary. Only in Real estate loans it offers sensible protection. But here too, it is important to compare and pay attention to the details. The price differences between insurance policies amount to several thousand euros.

As mentioned above, residual debt insurance promises protection against death, unemployment and occupational disability. But for these three cases, there are already standalone products on the market that will give you better protection:

  1. Term life insurance
  2. Occupational disability insurance
  3. Statutory unemployment insurance

If you become unemployed, the state will normally pay you unemployment benefits. This is of course less than your previous salary. Nevertheless, you should try to limit the loan term, i.e. pay it off quickly, also to keep the interest burden low. If that is not possible, you can talk to the bank and lower interest rates or one Installment break However, this makes your loan even more expensive.

Yes, it is possible – and policyholders are apparently making above-average use of it. According to a study by the Hamburg Consumer Advice Center, the cancellation rate for residual debt insurers is unusually high. The rate indicates how many contracts were prematurely terminated within a calendar year.