Residual debt insurance – how useful is it?

A man signs a residual debt insurance policy

Anyone who builds or buys a property usually takes out a loan to finance it and thus enters into a high commitment for a long period of time. Residual debt insurance is available in the event that the main earner drops out and the loan installments can no longer be paid as usual. In this article, you will learn in which cases the coverage provides, whether it makes sense to take out and what alternatives are available.

What is residual debt insurance?

Residual debt insurance is often offered by banks along with a consumer loan. You pay a one-time insurance premium when taking out a loan and are covered for the duration of the loan.

With a residual debt insurance, you can also secure your construction financing loan if desired. If you can no longer repay the loan for certain reasons, the insurance cover kicks in. When residual credit insurance will pay benefits depends on the terms of the contract. As a rule, the protection applies in the following cases:

The decisive factor for the payment of the insurance is that the borrower can no longer meet his payment obligations for reasons that are not his fault.

There are 2 types of residual debt insurance:

  • Contracts with a sum insured that adjusts to the annuity repayment
  • Contracts with linearly decreasing sums insured

In both cases, the sum insured decreases over time as you repay the loan as agreed. Ideally, you should opt for a protection with annuity falling benefit. This is the only way you can be sure to cover the entire residual debt in the event of an insured event.

With a linear sum insured, the insurance benefit could decrease faster than the remaining debt amount – so there is a risk of underfunding.

What does residual debt insurance cost??

The cost of residual debt insurance depends on various factors:

  • Insurance sum
  • Term
  • Covered risks (death only, death and unemployment or death, unemployment and disability)
  • Age of the borrower resp. Insured

A comparison by stiftung warentest from 2018 revealed significant price differences in insurance premiums. A comparison is therefore worthwhile.

Can I cancel a residual debt insurance policy?

Usually, the term of the residual debt insurance corresponds to the loan term. Whether a separate termination is required after repayment of the loan, you will find out after a look at the contract conditions.

If you repay the loan prematurely as part of an unscheduled repayment or if you reschedule the debt, you have a special right of termination.

Whether you can cancel the residual debt insurance while the loan is still running is determined by the insurance terms and conditions. Some policies have a term of one year and renew for an additional year at a time. In these cases, you can cancel with a notice period of one month to the end of the term.

With other policies there is a minimum term. During this term, cancellation is not possible. After that – as described – the annual renewal applies, so you can cancel at the end of the insurance year.

However, you should weigh the decision very carefully and consider whether the insurance cover is actually no longer necessary. You may need the consent of the financing bank to cancel, so it's best to look in your documents.

What are the alternatives to residual debt insurance?

When it comes to protecting the family, term life insurance is a good alternative to residual debt insurance. Term life insurance pays out in the event of the death of the insured person, so ideally the main earner in the family should take out appropriate cover.

Compared to the residual debt insurance, the term life insurance convinces with lower premiums, since only the risk of death is covered here. With some providers, you have the option of agreeing a decreasing sum insured, so that you can link the insurance benefit to the residual debt of the loan.

For insured persons with health problems, term life insurance is often not a suitable choice. Pre-existing conditions can result in premiums being significantly increased or coverage not being considered at all. In these cases, it is easier to take out residual debt insurance, where the health check is usually less strict.

Result: no obligation to the conclusion of a remainder debt insurance

Many lenders offer residual debt insurance in connection with construction financing. There is no obligation to take out a loan, but in view of the high level of liabilities, you should nevertheless consider taking out suitable insurance cover. In addition to residual debt insurance, this may also be term life insurance.

You repay a construction loan over a very long period of time. No one can look into the future and know what will happen. When the main breadwinner dies, the surviving dependents are left not only with their grief, but also with high debts that they may not be able to manage. The type of coverage you choose – whether residual debt insurance that includes other risks or term life insurance that covers the risk of death – depends on your requirements.