Residual debt insurance - what to look out for
When you buy a property or build a house and take out a loan for this purpose, large sums are often involved. For this reason, it can make sense to take out residual debt insurance. It serves to secure the loan and is a particularly sensible measure if a sole earner is responsible for the installment payments and thus bears the sole risk. It takes effect in the event of illness or other loss of earnings, as well as in the event of the death of a borrower. Such insurance can also be claimed in divorce cases under certain circumstances. In some cases, residual debt insurance also pays retroactively if the claim was made in due time. It takes a bit of uncertainty out of the loan process and ensures liquidity for property buyers. Thus, it is a sensible measure not only from the borrower's point of view, but also from the lender's.
Definition and benefits of residual debt insurance
The residual debt insurance comes into play when a borrower is no longer able to repay the installments for the repayment or even the entire loan amount. Reasons for this can be of various kinds, such as the borrower's incapacity to work or occupational disability, divorce or death. In addition, contingent liability insurance can also apply in the event of unemployment. Exactly which cases are covered by the insurance depends on the contract and the conditions agreed upon there. This can only be taken out in combination with a loan agreement. This distinguishes residual debt insurance for loans from term life insurance, which can also be taken out independently of the loan agreement. The term of the residual debt insurance usually corresponds to the term of the loan. If it was taken out through the bank, it ends automatically. You also have the option to revoke the residual debt insurance within 30 days of taking out the policy, but the revocation then also applies to the entire loan.
Advantages and disadvantages
If you take out residual debt insurance for houses, you provide yourself with a higher degree of security. In addition, there is the option in many cases to take out only individual components of the insurance. For certain occupational groups, for example civil servants, the risk of unemployment is rather low, so that coverage is not necessary here. However, if you are ill for a longer period of time and thus have a loss of earnings, the residual debt insurance also covers you in the event of sick pay and enables you to repay the remaining loan amount. Furthermore, you can take out Residual debt insurance without health examination. In addition, it covers surviving dependents in the event of death. The disadvantages include the comparatively high cost of residual debt insurance and the increase in the total loan amount by the insurance. In addition, the terms and conditions may contain hidden deadlines and waiting periods.
Costs and alternative cover
If you take out a residual debt insurance, high costs are incurred in some cases. There is no general answer to how high these costs will be, as the insurance costs depend on several influencing factors. These include the loan amount and term, the scope of insurance benefits, and the creditworthiness of the borrower. And even if the residual debt insurance does not require any health examinations, there is still some personal information that affects the costs. These include the borrower's occupation, gender and age, and information about risk factors such as smoking must also be provided. They all potentially increase the cost of insurance. Since this type of insurance is comparatively expensive, the question often arises whether you should take out residual debt insurance or term life insurance. The latter is usually cheaper and can be taken out independently of the loan agreement. However, this involves a careful and extensive health check. This can make it difficult for people with previous illnesses to take out term life insurance. In addition, credit life insurance only takes effect in the event of death, but not in the event of incapacity for work, divorce or unemployment. Alternatives in the event of occupational disability are occupational disability insurance or private accident insurance.
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