Der Tagesspiegel reports on the case of a 26-year-old borrower who took out a residual debt insurance for a loan of 6,200 euros, which cost him 1,700 euros. Possibly an extreme example, but apparently the number of downed debt insurance policies is increasing in times of low interest rates. According to a survey conducted by the market research institute GfK, just over a quarter of borrowers concluded such a policy last year. For loans raised via the internet, the share was slightly lower at 20 percent, and at brokers’ deals at 28 percent, slightly above the average.
Interest also on the residual debt insurance
A residual debt insurance sounds once for additional security and thus for a good idea. It is therefore quite possible that some borrowers spontaneously decide to conclude the policy without taking a closer look at the costs. Possibly, this additional option was already pre-filled in the loan application. This is quite common at some banks, as Stiftung Warentest recently criticized in an otherwise very positive rating for online credit. For the borrower, this may mean that the, in principle, very favorable interest rates for his loan through a residual debt insurance ultimately move in the upper range. The cost of the policy will be due immediately upon completion and added to the loan amount. Thus, interest must also be paid for the policy.
Remaining debt insurance is rarely needed
Both Stiftung Warentest and the consumer centers have been criticizing this procedure for the conclusion of a residual debt insurance for two decades. In some other European countries, where the remainder insurance business has been particularly booming, for example in the UK, the relevant financial regulators have intervened. In the Federal Republic, however, the Federal Financial Supervisory Authority (Bafin) does not seem to need any action so far. However, the German financial regulator calls on its website consumers to “before the conclusion of the contract necessarily about the exact scope of insurance and the costs” to inform. Bafin figures also show that residual debt insurance is rarely needed. According to the agency, only 0.15 percent of all completed policies actually incur a claim.
Cheap alternative for security-oriented borrowers
However, with higher loan amounts, it may make sense to make provision for emergencies so that relatives do not have to repay their debts after the death of the borrower. However, this does not necessarily mean that the bank’s debt protection insurance must be taken out. A standard term life insurance fulfills the same purpose and is to have significantly cheaper, especially for direct insurers.