Is credit protection insurance right for you?

Payment protection insurance

A residual debt insurance is taken out to secure mortgage lending. It is also known as payment protection insurance or credit default insurance. If the insured person dies during the term, the insurance company pays the outstanding balance of the real estate loan for a house or a condominium. Illness or unemployment can often also be insured.

Term life insurance as an alternative to residual debt insurance

The residual debt insurance covers the outstanding residual debt of a real estate loan if the insured person dies during the term. In addition to insurance cover in the event of death, you can also insure yourself against the risks of disability, occupational disability, involuntary unemployment or reduced income - for example due to short-time work.

Important: You are not legally obliged to take out residual debt insurance when taking out a mortgage loan for a property. However, some banks insist on such protection. In this case, you are free to choose your insurance. Often times, the bank granting you the loan will offer payment protection insurance. However, depending on the provider, the costs and services can vary greatly. It is therefore worth comparing several providers in order to find the cheapest tariff.

Even with a term life insurance (RLV) with a falling sum insured, you can secure a loan or a mortgage loan in the event of death. If an RLV with a falling sum insured is used to secure a real estate loan, it is often referred to as residual debt, residual credit or credit default insurance.

Because a real estate loan is usually repaid at a fixed monthly rate, the remaining debt to be paid decreases continuously. Therefore, an RLV is the best option, the insured amount of which falls roughly as quickly as the loan is repaid. However, you should make sure that the sum insured does not fall faster than the amount of the remaining debt.

This can be the case with linearly falling contracts. Because a loan amount falls more slowly at the beginning, as a large part of the loan installment is used for interest at the beginning. After a few years, however, the remaining debt drops faster, as an increasing part of the installments can be used to repay the loan.

An insurance sum that falls annuity is therefore usually the better choice for a mortgage loan. Here, the contract can be designed in such a way that the death benefit decreases roughly as quickly as the outstanding balance.

But there are also special residual debt insurances that go beyond the scope of a RLV.

While term life insurance only pays in the event of death, more extensive tariffs for residual debt insurance also apply in the event of unemployment or incapacity for work. However, such tariffs are relatively expensive and the services are often limited. For example, benefits can only be drawn for a limited period of time or only after a waiting and waiting period.

Benefits of term life insurance:

  • RLV with falling sum insured is usually cheaper than residual debt insurance
  • RLV usually offers adequate insurance coverage
  • Insurance cover and loan contract are separate from each other

Cancel residual debt insurance

Terminating residual debt insurance is basically very easy - but should be considered carefully. Usually an insurance can be canceled at the end of a payment period. The notice period is usually one month. To be on the safe side, you should read the exact terms of termination in your contract. The same applies to the termination of term life insurance.

If a loan to finance a property and a payment protection insurance have been taken out together, termination can be problematic. If you can pay off the entire loan with a special repayment, there is usually nothing standing in the way of canceling the residual credit insurance.

If this is not the case, the borrower usually only has the option of rescheduling the debt at the end of the loan agreement - a termination is not necessary for this. In the event of a debt rescheduling during the term of the contract, an early repayment fee must usually be paid to the bank.

A rescheduling is therefore usually not worthwhile, unless you have a very good alternative interest rate offer. For this reason, you should make an insurance comparison before taking out a loan and a term life or residual debt insurance.

Tip: If you have term life insurance with a decreasing sum insured, which also serves as carrier insurance for other insurances, you must consider the following when canceling: