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Stand:updated on 11.01.2022 | Topic Consumer protection Residual debt insurance

Residual debt insurance is a special form of term life insurance which guarantees the repayment of a loan debt in the event of death, unemployment or incapacity for work.

What are the benefits of residual debt insurance?

With residual debt insurance – often also referred to as payment protection insurance – you can secure the repayment of a loan debt for yourself or your heirs should you

  • die,
  • lose your job or
  • become unable to work due to illness or injury

during the term of the policy. In the event of death, the insurance pays the remaining debt so that the loan is repaid. In the event of illness or job loss, it takes over the loan instalments, usually for a limited period of time.

These insurance policies are often sold directly by the seller of a product, for example a car dealer or furniture store. Ultimately, however, the loan is offered by a bank that cooperates with the seller of the goods.

In practice, these policies are usually a type of contract known as a “genuine group insurance contract”, which means that the bank granting the loan is the policyholder and the borrower (customer) is the insured person. However, there are also contract arrangements where the policyholder of the residual debt insurance is the customer.

What does residual debt insurance cost?

The cost of residual debt insurance can make your financing considerably more expensive. If it is not clear to you how high the loan costs are with and without residual debt insurance, ask for a comparison, both for the total loan amount and for the monthly instalments.

Consumer tip

Make sure you read the information carefully, with regard to both the costs set out in the insurance contract and the amount, instalments and effective interest rate stated in the loan agreement

If residual debt insurance is taken out on a voluntary basis, the costs need not be included in the annual percentage rate (APR) of the loan. However, if the bank is not willing to give you the loan without residual debt insurance, it must include the costs for the insurance in the APR.

What are the advisory duties for residual debt insurance included in a group insurance contract?

The insurer and the policyholder conclude a group insurance contract to cover a specific risk, and consumers who meet the relevant risk requirements can be included in the contract as insured persons.

Example:
An insurer and a credit institution, as the policyholder, conclude a group insurance contract to cover credit default risks, e.g. in case the borrower becomes unemployed and cannot repay the loan as stipulated in the contract. When the loan is granted, the borrower is therefore included in the credit institution’s (policyholder’s) group insurance contract as an insured person.

In the case of such residual debt insurance contracts, the insured person has the rights of a policyholder. In particular, this means that they must be provided with the information and advice required under the German Insurance Contract Act (Versicherungsvertragsgesetz – VVG) and the Regulation on Information Obligations for Insurance Contracts (VVG-Informationspflichtenverordnung VVG-InfoV). If the insurance policy is brokered by a credit institution, the credit institution must fulfil the duties to provide information and advice. The advice must be documented, taking into account the complexity of the insurance contract offered.

Can I revoke a residual debt insurance contract?

For insurance contracts, as a rule only the policyholder can revoke the contract declaration. However, residual debt insurance in the form of a genuine group insurance contract is an exception, and here the insured person has the same rights as a policyholder, which also includes the right to revoke the contract. The provider of your insurance policy must inform you again in text form about your right to withdraw from the contract at the latest one week after you have submitted your contract declaration. In addition, they must provide you with another copy of the product information sheet. Read this information very carefully because, as a rule, the period for revoking the residual debt insurance commences as soon as you have received the aforementioned documents. The revocation must be declared to the insurer in text form and does not have to contain a reason. Timely dispatch is sufficient to meet the deadline.

Consumer tip

Is residual debt insurance the right choice for you? After entering into the contract, there is still time to reconsider your decision. You have the right to revoke your policy declaration within 14 days. For policies covering life insurance risks, i.e. the event of death, the revocation period is extended to 30 days. No reasons need to be stated for revocation.

The conditions agreed specifically for the loan contract remain unaffected by a revocation. The loan agreement is only changed, newly concluded or processed differently to the extent that the premiums for residual debt insurance that have already been paid and those that have been agreed are "removed".

Will paid premiums be refunded if I revoke the residual debt insurance?

If the policyholder or the insured person exercises their right of revocation in the case of a genuine group insurance contract, the insurer is required to reimburse only the share of the premiums paid for the period after receipt of the revocation, provided that the policyholder has been informed about the right of revocation, the legal consequences of revocation and the amount to be paid, and has agreed that the insurance cover commences prior to the end of the revocation period. The reimbursement obligation must be fulfilled without undue delay, at the latest 30 days after receipt of the revocation. If no such information was provided, the insurer must additionally refund the premiums paid for the first year of insurance cover. This does not apply if the policyholder has claimed benefits under the insurance policy.

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