There is no conversation in a bank branch about a loan that you are not necessarily advised to take out residual debt insurance. There is a simple background to this: if you take out residual debt insurance, your bank advisor usually earns in the form of a commission.
Of course, one should not forget that residual debt insurance makes sense in a number of cases and can become very important protection for many borrowers. But not in every case. Often enough, the disadvantages of residual debt insurance also outweigh the disadvantages and then this type of insurance makes your installment loan unnecessarily more expensive. Therefore, before taking out a loan, it is important to consider carefully whether residual debt insurance is useful and important, or whether you could also do without this insurance in this special case.
What exactly does the residual debt insurance do?
The residual debt insurance is a protection of the borrower, or in the event of death of the survivor or the heir of the borrower, against exceptional financial situations. The following can be secured:
- the death
- Illness / accident etc.
The benefits look different depending on the insured event. If the death occurs, the residual debt insurance immediately takes over the entire outstanding loan amount, so that the surviving dependents no longer have to worry about the open credit. This variant is a must, especially for larger loans – especially if there are children in the household and the sudden death of one parent would already cause considerable financial confusion in the household.
In the event of illness or an accident, the residual debt insurance can in many cases be designed in such a way that if the continued payment of wages ceases, it will cover the ongoing credit costs for the duration that you are unable to work and therefore only receive sick pay.
You have to consider this with a residual debt insurance
A classic occupational disability is often not covered by the residual debt insurance. As long as sickness benefit is paid here because e.g. B. If an acute illness persists, the residual debt insurance applies due to illness. However, if a full pension for disability would be granted, the benefits would not apply in most cases. You can only rely on permanent coverage in one of the two cases if there is an explicit provision for disability or disability in the respective insurance contracts.
If the inability to work due to illness or accident ends and you receive your normal salary again, you will bear the costs of the current loan independently from this point on.
If unemployment occurs, the same mechanism usually applies as in the case of sickness benefit. If you start a new job, you are again in the obligation to pay – even if your new income is lower than your previous one.
What are the benefits of residual debt insurance?
It provides reliable protection in the three situations mentioned. The good thing is that in most cases you can only take out separate components of the residual debt insurance. Because some professional groups only need to think about different scenarios to a limited extent. For example, a civil servant or a public sector employee who runs a collective agreement does not run the risk of losing his job. Protection against unemployment is not necessary here.
If you have traditional sickness insurance, sickness insurance covers the difference between your sickness benefit and your monthly salary. In this case, the residual debt insurance is not necessary and only causes additional costs.
Unless you have good life insurance that provides certain financial security for your surviving dependents, death should always be considered. You also have the option of restricting your residual debt insurance to the death and thus saving some insurance premiums.
Capital Lender Tip: Check exactly what form of residual debt insurance you actually need. In this way you can often achieve significant savings in insurance premiums and you really only hedge the risks that can actually be in the room. If you blindly conclude an RSV, you run the risk of double insurance!
Another important advantage is that no health check is required. If you want to take out life insurance, a medical examination will be required in most cases – at least your health status will be clarified by means of various queries by the insurer. If you have illnesses such as high blood pressure, obesity or already suffered heart attacks or strokes, this can significantly increase the cost of life insurance.
The same applies if you have survived a serious illness such as cancer in the past. All these things are not queried with a residual debt insurance.
Overview of the advantages of residual debt insurance
- Protection of the bereaved in the event of death
- Protection of the family if there is no income due to illness or unemployment
- No health check necessary
Disadvantages of residual debt insurance
Despite the advantages mentioned above, residual debt insurance as an insurance solution is repeatedly criticized. This has different backgrounds:
On the one hand, the way in which residual debt insurance is awarded is repeatedly criticized. As a rule, this is tied to the online credit to be granted in each case. This means that the amount of the insurance premium also results from the amount of the loan to be secured. In addition, however, there are in many cases comparatively high closing premiums for the respective credit intermediary or for the lending bank. This ensures relatively high insurance premiums, measured by the frequency with which this insurance is actually used.
Another point of criticism is how this insurance should be paid. With the residual debt insurance, you pay the full insurance premium when the loan contract is concluded. This is then added to the loan amount and paid directly by the lender to the respective insurance company. This increases your loan amount without you ever having the money in your own hands. With comprehensive residual debt insurance with a loan amount of 25,000 USD and a loan term of 10 years, an insurance premium of 3,000 – 4,000 USD can be achieved quickly. Since this has to be co-financed within the framework of the loan, this is clearly noticeable in the monthly debit, as well as in the total cost of the loan.
In addition, you should definitely check the conditions of the residual debt insurance in detail, since many insurers integrate waiting times for the benefits, so that you can not always enjoy full protection of the residual debt insurance if necessary.
Overview of disadvantages of an RSV
- Comparatively high costs for the insurance itself
- High closing premiums for the credit intermediary, which means that the consumer often does not even know whether this insurance is recommended to them for conviction or for financial reasons
- Increase in the loan amount through insurance and the associated significant increase in total loan costs
- Partly hidden deadlines and waiting times in the insurance conditions
Are there cases in which you should not waive residual debt insurance?
There definitely is. These are briefly summarized:
- Long-term loans of four or more years,
- Installment loan with a very high loan amount (loans over 20,000 USD)
- If the borrower has already received sick pay due to health problems or previous illnesses
- If the borrower has an employment contract that is permanent, but in an industry that can threaten unemployment
- For families with children in the household, especially if a single earner takes care of the maintenance of the entire family
Conclusion – the residual debt insurance can be an important protection – even if it is not the perfect insurance solution
There are numerous cases and situations in which residual debt insurance makes sense and is important. Nevertheless, the type of insurance of the residual debt insurance comes with some negative points that have to be considered when taking out the insurance.