When the bank approves a loan, it wants to see collateral. In addition to a sufficient income that should be above the garnishment exemption limit, many lenders offer credit insurance or residual debt insurance. This is to protect against risks such as unemployment, a long illness or the death of the main borrower and thus insolvency. But does such insurance make sense?
First, it should be noted that a residual debt insurance or installment protection insurance does not necessarily have to be taken out with the lender. The borrower can choose to hire another insurer. This gives him the opportunity to compare different offers and to choose the cheapest offer. Before taking out such insurance, however, a few things should be considered.
You should consider this with an insurance company for the loan
If it is a small consumer loan, credit insurance is usually not worth it. Disability or unemployment is often part of the contract as a risk. A premium of up to USD 800 and more may apply to loans under USD 10,000. In general, the cost of residual credit insurance depends on the amount of the loan. But the age of entry and the term of the loan contract are also decisive. This insurance premium is usually added to the loan amount as a one-off payment. This increases the loan amount and can make the loan more expensive. This can result in hidden interest that disguises the actual loan amount. It is important to know that the cost of insurance is not included in the calculation of the annual percentage rate.
Advantages and disadvantages of credit insurance
The advantage of residual debt insurance lies in unforeseen events, whereby the borrower or the relatives are sufficiently covered. In the event of a death, the outstanding loan amount is then taken over in full. As a result, the loan repayment is no longer available to the surviving dependents. If unemployment occurs or the borrower becomes unable to work, the loan amount is not taken over, but the monthly installments. This gives the borrower the opportunity to fully concentrate on finding a job. The advantage of this insurance also shows that payment is made immediately should an insured event occur.
The disadvantage of credit insurance, on the other hand, is that the insurer only receives the agreed benefits for a certain period in the event of unemployment or incapacity to work. Most are limited to a maximum of one year . After that, the borrower has to pay again. The borrower should also bear in mind that the residual debt insurance has a relatively high cost, since the health status of the borrower is not checked as with other types of insurance. This is of course also reflected in the costs. It may therefore make sense to take out occupational disability insurance separately. The cost of the residual debt insurance is added to the loan amount. This creates a higher loan amount.
When does it make sense to take out credit insurance?
Many banks also offer residual debt insurance when they take out a loan. This means that not only the lender but also the borrower has certain guarantees. The borrower may no longer be able to pay the monthly installments. However, if there is credit insurance, the due loan installments are taken over or, in the event of death, the entire loan amount. However, such insurance is not worth it if only a small loan is needed. With a higher loan amount, for example to buy a new car or buy a property, this insurance is useful. Especially when high loan amounts are involved. It is very important to secure the loan here. This can then be a residual debt insurance but also a so-called risk life insurance. However, if such an insurance already exists, this protection can be dispensed with.
Borrowers are advised not to be put under pressure when taking out credit insurance. Legislation prohibits tying a loan agreement to credit insurance, but there are still lenders who make a loan dependent on credit insurance. Under certain circumstances, credit insurance can make the loan very expensive. Therefore, a credit insurance comparison should be made. If a large loan with a long term is taken out, a residual debt insurance can be an option.
What does credit insurance cost and what should you watch out for?
The costs for residual credit insurance are staggered:
- For complete protection, for example, there are costs of around 990 dollars to 2900 dollars.
- Borrowers pay around 240 dollars for standard protection
- around 890 dollars for death.
The insurance is practically extended to the borrower. This means that there is a higher loan amount and higher interest. A comparison should be made so that unnecessarily high premiums are not paid. Because with the same performance, different contributions are shown. Anyone who decides to take out residual credit insurance should definitely pay attention to the cancellation periods. So it has happened that the loan was paid long ago, but the insurance continues. It is equally important to pay attention to the scope of services. There are insurers who only pay the installments if they are unemployed for 12 months. This was also found in the case of incapacity to work. So-called exclusion clauses are also important. This means that termination is not paid in the case of self-inflicted termination. There is also no obligation to pay for known diseases.