Are you considering taking out a life insurance loan? Are you still undecided whether the benefits of credit insurance are actually healthy in relation to the costs?
We do not want to suggest or excuse you to take out credit insurance. We will provide you with facts and alternatives. Credit insurance is usually only offered as an option. How you decide is up to you.
Credit with death insurance – credit insurance
Nobody likes the idea of bequeathing debt. Consequently, it would make sense to take out a loan with death insurance. In the event of death before the loan is repaid, the insurance will cover the remaining amount. In this case, the family is not liable for the testator’s insured credit debts. But family members who might turn down the legacy are not the real beneficiaries.
Credit insurance is optionally offered by credit institutions. Lenders prescribe residual debt insurance (RSV) only in exceptional cases. The voluntary nature of taking out credit insurance means that there is no obligation to show the insurance premiums in the annual percentage rate. If credit institutions had to do this, the credit insurance market would likely collapse.
Compared to interest rates, depending on the term and age of the borrower, an RSV can easily double the financing costs. Even so, many clerks are pushing to get a mortgage, unemployment, and health insurance loan. In principle, the bank benefits from this in two ways. Your money is invested more securely and you get a good commission for brokering the insurance.
The main beneficiary does not pay – credit insurance
The bank records the main benefit of an RSV. Your lending is safer and you earn lavish commissions. The borrower alone bears the costs of the RSV. As the credit conversation progresses, most borrowers don’t even really realize how much more money they are spending. Her focus is on “not annoying” the clerk so that he can approve the loan. The bottom line is to come out of a rate that is portable.
Many borrowers also ignore the fact that often loans are not fully repaid only through regular installment payments. We are happy to take out a loan with small installments and the right to make any special repayments free of charge. If there is any money left in the household budget, additional payments will be made. Each special repayment shortens the remaining term. It is not uncommon for borrowers to reschedule before the end of the term.
In all cases mentioned, the insurance premium already paid will not be calculated back. The insurance coverage paid would not even be transferable to the debt rescheduling loan. It expires in favor of insurance. Few people are aware of how much money borrowers can effectively give away through bank-backed loans.
Credit insurance costs
Unfortunately, it is precisely the cost argument that speaks against credit insurance via the bank. Paying around 10 percent of the loan amount for insurance coverage is nothing unusual for an average borrower. With a 15,000 USD loan, it would be 1,500 USD for insurance protection. If the loan is really only to be taken out with death insurance, a contribution of 1500 USD is a lot of money.
If the 15,000 USD, term 5 years, were insured externally by a risk life insurance, this sum would correspond to a total of 300 USD in total insurance premiums. If the policyholder died only in the last year of the loan term, the family would – after the loan was repaid – even keep a substantial sum. With the RSV, only the outstanding amount would be offset.
A similar model to credit insurance, with diminishing insurance coverage, would be linear risk life insurance. In this case, insurance for non-smokers born in 1970 currently costs around 37 USD a year. – Or 185 USD over a period of 5 years. With this price difference, everyone ponders whether the loan with death insurance through the bank is worthwhile in individual cases.
Who grants credit without having to use credit insurance?
In order to sell easily, comparatively expensive residual debt insurance, the personal customer appointment for the loan is the ideal prerequisite. In personal conversation, the bank’s adviser is trusted, it is easy to stir up fears. Borrowers act emotionally and sign what the advisor presents. This also applies to home visits by credit intermediaries who like to sell a loan with death insurance (additional commission).
Cases are known in the media where credit insurance had to be paid even though no credit was brokered. The least risk of getting on black ice arises with the regular online loan using a free comparison calculator. The RSV may or may not be completed with a tick. The small tick has no influence on the lending. Inquiries from an intrusive adviser are also not to be feared.
Conclusion – credit with death insurance
Insurance coverage is always a pleasant thing in the event of damage. Nobody wants to leave debts to his family, from this perspective, credit insurance can make sense. The crucial question remains, is insurance sensible and, if so, with whom is it taken out?
It is not advisable, motivated by the advisor or hoping for better credit opportunities, to take out a loan with death insurance. The bottom line is that better insurance coverage can be found on cheaper terms if insurance and credit remain separate.
Risk life insurance and credit can be separated for almost all credit providers, even if some advisors, for reasons of commission only, do not give this impression.