Warnings issued against the specific insurance: Millions of Germans hold the policy
Residual debt insurance, also known as credit insurance or installment protection insurance, is a common product in consumer lending, but it is often met with criticism. This insurance is primarily sold in loans such as car loans, general installment loans, and financing for consumer goods like devices or furniture.
The insurance promises to cover remaining debt if the borrower dies, becomes disabled, or involuntarily unemployed. However, there are significant concerns about its effectiveness and cost.
Criticisms of Residual Debt Insurance
One of the primary criticisms is the lack of expertise among insurance brokers selling residual debt insurance. These brokers often have limited specialized knowledge about the product or the borrower's specific needs, leading to mis-selling or lack of clarity for consumers.
Another issue is the many exclusions and limitations in the policies. The policies often contain numerous exclusions, meaning that claims may not be paid for common disabling conditions or unemployment scenarios. This reduces the actual protection offered.
The costs of residual debt insurance are frequently bundled into the loan or financing cost without clear disclosure, making it hard for consumers to know what they are paying or to compare with standalone insurance options.
There can also be aggressive sales tactics at the point of loan origination, with consumers feeling pressured to accept the insurance without fully understanding the terms or their alternatives.
Financial Experts' Advice
Due to these factors, financial experts often advise consumers to carefully evaluate the cost-benefit of residual debt insurance and consider other more transparent insurance or emergency funds instead.
While some residual disability policies with specific riders (e.g., residual disability rider, catastrophic disability rider) can provide proportional income loss benefits for partial disability, these often relate to personal disability insurance rather than the typical residual debt insurance sold with loans.
In summary, residual debt insurance is widely used in consumer lending but is often viewed as an expensive and limited protection product, criticized for lack of transparency, numerous exclusions, broker inexperience, and high-pressure sales tactics. Consumers are encouraged to thoroughly research and understand this product before making a decision.
[1] BaFin (2019): 29 percent of surveyed consumers had taken out residual debt insurance to secure their loans. [2] Consumer Advice Center: The Consumer Advice Center's stance on residual debt insurance in loans is clear: it is not recommended. [3] Consumer Advice Center: The Consumer Advice Center considers residual debt insurance to be expensive. [4] Consumer Advice Center: The Consumer Advice Center's warning against residual debt insurance applies to loans specifically. [5] Consumer Advice Center: For the Consumer Advice Center, the pressure exerted on individuals to buy residual debt insurance is a major criticism point. [6] Consumer Advice Center: The insurance conditions of residual debt insurance often contain extensive exclusion and waiting period clauses, making it questionable whether the insurance will actually pay out. [7] Consumer Advice Center: Many brokers of residual debt insurance are not experts, according to the Consumer Advice Center. [8] Consumer Advice Center: The actual effective annual interest rate was often higher than the interest rate stated in the loan contract due to the residual debt insurance costs. [9] Consumer Advice Center: These additional costs did not have to be shown in the effective annual interest rate, according to the report. [10] The insurance premium for residual debt insurance is often paid as a one-time amount directly with the loan, increasing the net loan amount and interest costs. [11] The insurance sum for residual debt insurance is based on the loan amount. [12] Experts question the necessity and usefulness of residual debt insurance.
Personal finance experts urge caution when considering residual debt insurance, often bundled with loans for consumer goods, car loans, and general installment loans. Due to a lack of transparency, high costs, numerous exclusions, and limited broker expertise, they recommend consumers evaluate the cost-benefit and consider more transparent alternatives, such as standalone insurance or emergency funds for personal-finance security.
