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Payment protection insurance

Expensive and often unnecessary

Josefine Lietzau
Expert for banking and credit as of November 11, 2020

Josefine Lietzau

Josefine Lietzau is an editor in the Bank & Investments team. During her studies in German and English, she worked for the editorial offices of the Green League, the Jüdische Zeitung and the Superillu. After completing her master's degree, Josefine Lietzau completed an internship at the online consumer portals Banktip and Posttip, where she then worked as an editor.

  • If you want to take out an installment loan, you will often be offered residual debt insurance. It should step in when you can no longer pay your loan installments.
  • But insurance is expensive and makes little sense. We have calculated this for you using an example.
  • A residual debt insurance should take effect in the event of death, unemployment and prolonged illness. An investigation by the Bafin shows, however, that the insurers often do not want to pay.

Regardless of whether you take out your loan directly from your house bank or first compare loans via an internet portal - you will usually be offered residual debt insurance with the loan. If you cannot pay the installments, for example because you have lost your job or are ill for a longer period of time, the insurance company should step in. That sounds sensible at first, but the contracts have many catches.

What should a residual debt insurance protect you from?

A residual debt insurance actually sounds like a good idea. Unemployment and illness can affect anyone, after all. Then if you don't have to worry about the loan, that's a relief. And death protection helps the family when they have enough to do with grief.

Nevertheless, we advise against the insurance. There are two reasons for this: Insurance is very expensive. She also performs Not often. There are arguments especially when you become unemployed or sick and the insurance is supposed to pay.

For banks, however, residual debt insurance is a lucrative business: the banking supervisory authority Bafin found in a market study in 2019 that the banks sometimes receive more than 50 percent of the insurance premium as commission. So it's no wonder when a consultant tries to convince you of such a contract.

The residual debt insurance is not compulsory

Even if the bank employee urges you to close, the following applies: A residual debt insurance is not mandatory for borrowing. The insurance usually does not ensure that you pay lower interest on the loan.

So when you take out a loan, make sure that you do not take out any insurance, and do not allow yourself to be misled by the advisor or the presentation of insurance offers on loan comparison portals.

More on this in the credit guide

  • With loans, you can reduce the costs by comparing interest rates on portals.
  • Our provider recommendation: Verivox, Check24

To the advisor

What is the cost of residual debt insurance?

How expensive the insurance is for you is not that easy to say. There are no fixed prices. The only way to find out what you have to pay is to get a loan offer with insurance. We did just that.

Our sample customer takes out the loan alone. She works as an employee and earns 2,800 euros net per month. She pays 780 euros for the rent. She wants to pay off the loan of 10,000 euros within 36 months.

She would like to take out residual debt insurance with the loan, which will cover in the event of death, incapacity for work or unemployment. We received the following offers:

Insurance offers for an installment loan over 10,000 euros

insuranceInsurance costsInterest on credit
Creditplus / Axa France S.A.801,54 €683,54 €

Postbank / PB Lebensversicherung AG

859,59 €631,15 €

Santander / Santander Insurance Life DAC

1.320,41 €1.491,99 €
Targobank / Targo Lebensversicherung AG932,71 €596,60 €
SWK / Société Générale Insurance900,34 €813,65 €
1822direkt / Axa France S.A.675,95 €552,42 €

Source: Insurance contracts of the providers / Finanztip calculation (as of September 23, 2020)

The premiums for the insurance in the offers submitted to us amount to 6 to 13 percent of the payout amount. This puts them close to the 15.6 percent that the Nuremberg Regional Court for "alarmingly high“(Judgment of April 7, 2014, Az. 6 O 754/14).

Our example also shows that if you get an average interest rate, you might pay more for insurance than credit!

The costs for the insurance are divided: One part is for the insurance for death protection, one for protection in the event of incapacity for work and one for protection against unemployment. In most of the contracts we examined, our sample customer would pay the most to secure the loan against unemployment. According to the investigation by the financial supervisory authority Bafin, it is precisely in this area that insurers refuse to pay. Individual insurers have Over half of the unemployment benefit cases were rejected.

You cannot easily see how expensive the insurance is: The costs are not included in the interest rate (Section 6 (3) No. 4 PAngV). This makes comparing loans with insurance more difficult for you. You then need to look at the rate or the total cost instead of the interest rate.

If you include the contributions for the insurance in the loan costs, they drive up the interest on the installment loan. To make this clear, let's take the same example case as above.

Actual effective interest rate including residual debt insurance

BankCost of
insurance
specified
Effective interest rate
actual effective interest rate
with insurance
Credit plus801,543,99 %9,62 %
Postbank859,59 €3,79 %9,68%
Santander1.320,41 €7,98 %18,42 %
Targobank932,71 €3,48 %9,91 %
SWK900,34 €4,85 %11,11 %
1822 directly675,95 €3,19 %7,96 %

Source: Finanztip calculation (as of September 23, 2020)

We will show you with a few examples what such regulations can mean for you, for example if you become unemployed. How long the times actually are depends on the respective contract:

  • Only the first twelve months of the insured event are covered. If you are unemployed for a longer period of time, you will no longer receive any money.
  • It is only paid after a waiting period of six months and an additional waiting period of three months. This means that you pay for the insurance during these months, but you would not receive any benefits.
  • The insurance only pays for three benefit cases. If you become unemployed a fourth time, the insurance will not pay you.

For the contracts that our sample customer received, these restrictions looked like this in detail:

Waiting and waiting times for insurance companies

Bankwaiting period
incapacitated
Grace period
incapacitated
waiting period
unemployed
Grace period
unemployed
Credit plusx30 days6 months3 months
Postbankx3 months6 months3 months
Santander3 months42 days3 months2 months
Targobankx3 months6 months3 months
SWK90 days42 days90 days30 days
1822 directly6 weeks6 weeks3 months1 month

Source: Insurance contracts of the providers (as of September 23, 2020)

In addition to waiting times and waiting periods, there are numerous other exclusions. So the death protection does not apply in case of suicide. The providers also do not pay for incapacity for work due to mental illness or pregnancy. The contracts also list illnesses for which the disability cover does not apply and the insurance company refuses to pay.

If you commit "wrongdoing" at work and are therefore terminated, you will have to continue paying off the loan installments without the help of the insurance company. It is not even defined what is behind the term misconduct. Even if you worked for a family member and are given notice, the insurer may not pay.

The contracts for residual debt insurance are designed differently. So you have to take a close look at when the insurance pays and when not. However, you cannot choose the insurance you want. If you want to take out residual debt insurance, you have to take the one that your bank offers you for credit.

However, there are a few similarities between the providers. According to Bafin, insurance companies often refused to pay in the following cases:

  • if the insured died as a result of an addiction,
  • could no longer work due to a mental illness or
  • became unemployed during the waiting period at the start of the contract.

Not all exclusion clauses are legal. The Federal Court of Justice (BGH), for example, found the following regulation too unclear: "The insurance cover does not extend to serious illnesses known to the insured person" (judgment of December 10, 2014, Az. IV ZR 289/13).

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Can you cancel the insurance?

If you - perhaps by mistake - have taken out payment protection insurance, you can withdraw. You usually have up to 30 days. It does not matter whether it is an individual insurance or a group insurance (§ 7d VVG). With group insurance, you are only the insured person and not the policyholder. Until 2018, you were worse off with such contracts.

A special feature of revocation: If you have selected several contract components - i.e. death, incapacity for work and unemployment - different rules apply. An objection period of 30 days applies to residual debt life insurance - i.e. protection in the event of death (Section 152 (1) VVG). A period of 14 days applies to the other modules (Section 8 (1) VVG). Since providers usually sell residual debt insurance as a package that usually includes death protection, the longer period of 30 days often applies.

The Incidentally, the withdrawal period does not start immediatelyafter you have sent the loan agreement to the bank. They have to instruct you again about your right of withdrawal from the insurance company and send you a product information sheet. Only then does the withdrawal period begin (Section 7a (5) VVG).

Get rid of insurance and installment credit together

You have one more option to withdraw, and that is not the insurance directly. Instead, it works over the credit. With that you have your own withdrawal period anyway. But: with many loans, the banks have Error in the cancellation policy made. For example, they have not adequately indicated that a loan with payment protection insurance is a related business.

For you, this means that you can often revoke the loan agreement and with it the insurance even after the actual expiry of the revocation period (Section 358 (2) sentence 1 BGB, BGH, judgment of January 18, 2011, Az. XI ZR 356 / 09).

The consumer center Hamburg offers for a fee of 100 euros to review credit agreements with residual debt insurance. If an error is found, you will receive a sample letter for the revocation with which you can request the repayment of part of your insurance premiums.

Remember: if you withdraw the loan, you must get your Debt at your bank within 30 days numbers. As a rule, this is the net loan amount with an interest rate customary in the market (OLG Hamm, December 11, 2013, Az. 31 U 127/13). You either need to have enough money in the account or take out a low-interest loan. The revocation can be worthwhile if you have an expensive loan whose interest rate is higher than the average.

Reversal and insurance premiums

After the cancellation of your residual debt insurance you will get part of the insurance premium back. How much is handled differently by the banks: Some simply offset the insurance costs against the loan and, for example, lower the rate or shorten the term. Other credit institutions simply pay you the money for the insurance into your account. In its investigation, the Bafin did not find any problems with loan agreements after the associated insurance was revoked.

Whether the banks have to reimburse the insurance costs proportionally and in full after a revocation is somewhat controversial from a legal point of view. Some lawyers believe that the bank must repay all insurance premiums. They refer to a judgment of the Federal Court of Justice. According to this, a customer must be able to withdraw from a related business without consequences, i.e. also free of interest and costs (November 18, 2011, Az. XI ZR 356/09).

Other lawyers are of the opinion that the bank only has to reimburse half of the insurance premiums for the period up to the cancellation of the loan agreement. This is also how the Berlin Regional Court sees it (judgment of 23 September 2014, Az. 4 O 65/14). In this case, the borrower was able to revoke the loan due to incorrect cancellation policy at a related business. However, he had to pay the pro rata premiums for the insurance cover he received, albeit only half. Since the bank also had an advantage through the residual debt insurance, the court considered it appropriate to reduce the compensation to half of the premium actually paid. The OLG Hamm (December 11, 2013, Az. 31 U 127/13) issued a similar judgment.

Can you cancel your residual debt insurance?

If the withdrawal period has already passed, you can always cancel the residual debt insurance. There are two ways to do this.

If you repay the loan early or reschedule it, i.e. pay off a loan with someone else, you have a special right of termination. The reason is that the insurance purpose for the residual debt insurance does not apply. However, the insurance ends not automatically. You have to cancel separately. Ask the insurance company to pay you back the pro-rata premiums.

This termination is already provided for in many contracts. If the insurance company does not accept your termination and refers to the normal notice period, you should not accept it.

If your contract gives you a proper right of termination, you can also terminate without rescheduling. A notice period of two weeks to the end of each month is customary. After the termination, you have the right to have the insurance reimburse the unused portion of the risk premium. The initial commission is not returned, some providers also deduct a so-called cancellation fee.

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What alternatives to residual debt insurance are there?

If you want to secure a loan, there is Alternatives to residual debt insurance. These are particularly interesting in the case of mortgage lending.

Because, unlike with installment loans, it makes perfect sense to secure the residual debt of a real estate loan with mortgage lending. The main aim is to protect the bereaved in the event that the borrower dies before the construction loan is repaid. The best way to do this is to take out term life insurance. You can choose between different variants of the sum insured: It can remain the same over the entire term or decrease in parallel to the remaining debt of your loan.

With the money from a term life insurance, your relatives can then in the event Your death replace the loan. In the case of mortgage lending, however, you should note that a high prepayment penalty becomes due. You can avoid this in part if your loan agreement allows high special repayments.

You can also insure the risk of a longer illness: with an occupational disability insurance. If you can no longer work in the long term due to illness, you can continue to pay your loan with the pension from the disability insurance.

Finding alternative coverage in the event that you unemployed will. Nevertheless, the costs of a residual debt insurance are in no reasonable proportion to the protection offered. The following ways are therefore better:

  • Basically try yours Installment loan to be paid off as soon as possible. The less money is still open, the lower your financial risk.
  • If it gets financially tight, you can try in consultation with the bank to lower the monthly paymentsby repaying the loan over a longer period of time.
  • Some credit also see one Rate break in front. You can then suspend payments for a few months, for example if you become unemployed. However, the loan may then be more expensive.

In any case, you shouldn't just stop paying or let direct debits go back if you're in financial trouble. Always speak to your bank immediately in the event of payment difficulties.

Josefine Lietzau

Josefine Lietzau

Josefine Lietzau is an editor in the Bank & Investments team. During her studies in German and English, she worked for the editorial offices of the Green League, the Jüdische Zeitung and the Superillu. After completing her master's degree, Josefine Lietzau completed an internship at the online consumer portals Banktip and Posttip, where she then worked as an editor.

Dr. Britta Beate Schön

Dr. Britta Beate Schön

Britta Beate Schön is responsible for all legal issues at Finanztip. The doctor of law and attorney was head of the legal department at financial service providers such as Telis Finanz AG and Interhyp. Before that, she taught and researched in Japan as a DAAD junior professor for German and European law. She completed her studies in Münster, Geneva, Regensburg and Leipzig. You can reach the author at [email protected]

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