How useful is a residual debt insurance?

Residual debt insurance is actually indispensable in the eyes of bankers when taking out a loan. If the borrower dies during the loan period, the policy discharges the existing loan amount. The contract also covers the borrower if he becomes unemployed or incapacitated through no fault of his own. What sounds good at first, but also has its hooks. Both unemployment and disability clauses do have pitfalls before the insurer is obligated to provide benefits. Borrowers should examine the residual debt insurance but also under cost points carefully.

A term insurance policy is often the cheaper option for coverage

The APR remains unaffected

Borrowers compare loans primarily by means of the annual percentage rate of charge. This makes it clear which provider offers the most favorable deal. If bank customers decide to include residual debt insurance now, they may end up choosing the most expensive option. Why?

The credit agreement and the residual debt insurance represent two legally independent contracts, offered by two different companies. The premium of the insurance has therefore nothing to do with the cost of the loan.

However, the premium for residual debt insurance is charged in one sum and added to the loan amount. This of course increases the loan amount and the monthly installment. The contribution of the residual debt insurance varies from provider to provider. In the most extreme case, the borrower chooses the bank with the most favorable loan conditions and the most expensive insurance premium. This eliminated the need for the entire loan comparison, the monthly loan rate moves far from what the APR promised. Consumer advocates have been complaining for years about this lack of transparency.
The residual debt insurance has another deficit. In the event of early loan redemption, for example, by rescheduling, the remaining contribution is forfeited. When debt is rescheduled with renewed insurance coverage, the borrower effectively pays the premium twice.

Which solution offers?

Those who want to protect their loan with residual debt insurance should request both a sample calculation without an insurance premium and a sample calculation with an insurance premium from several providers. This is the only way to see which provider is actually the most favorable overall.
However, there is also an alternative procedure. Banks can't force a borrower to purchase the policy through their contractor. The cheaper alternative may well be to choose a term life insurance policy with a falling sum insured. This can be matched in term to the term of the loan. By including disability insurance, it also covers this potential risk. In the case of a debt restructuring, the contract continues with the new loan, since it is not linked to the existing loan.
Basically, the question arises as to when there is a need for residual debt insurance at all. Of course, the passing of the family member means not only a personal loss, but a financial loss as well. However, the question arises whether a loan over 5.000 euros poses an existential threat to the surviving dependents.
Death benefit insurance offers another way to protect survivors from the financial impact of a loan in the event of the borrower's death. Unlike term life insurance, which has a fixed expiration date, death benefit insurance must provide a benefit one day in any case. Another advantage of these policies is that they are also offered without a health check. This makes them suitable for borrowers who have a pre-existing condition at the time of loan closing that would result in a benefit exclusion or additional premium for residual debt or term life insurance policies.

The residual debt insurance that really makes sense.

There is a special form of income protection, which works like a residual debt insurance, but where not only loan installments, but the income can be secured.