Experts warn: residual debt insurance is expensive and unnecessary!

Experts warn: residual debt insurance is expensive and unnecessary!

From January 2, 2025, new regulations for residual debt insurance will come into force. These insurances are often used in connection with credit agreements and protect the installments in the event of death, incapacity to work or job loss. However, experts warn about the cost and effectiveness of these policies and advise against taking them out. The Association of Insured People (BdV), a consumer protection association, describes residual debt insurance as “massively overpriced” and points out that it often only offers incomplete insurance protection. In addition, the high costs increase the financial burden on consumers, while in reality insurance companies rarely pay out.

The changes from January 2025 are part of Section 7a Paragraph 5 of the Insurance Contract Act (VVG), which states that a residual debt insurance contract may only be concluded one week after the loan agreement has been signed. Many consumers take advantage of these insurance policies in the assumption that their loan installments will be protected in the event of an emergency. However, there are actually significant risks that are often not clearly communicated. Consumers often have to deal with high pressure and commissions when brokering, which leads to a lack of expertise as brokers are usually not insurance experts.

Criticism of residual debt insurance

The consumer advice center not only highlighted the high costs of these insurance policies, but also criticized the frequent exclusions and waiting period clauses in the contract conditions. In addition, borrowers often have to pay higher effective annual interest rates than stated in the loan agreement. The industry in which these policies are offered ranges from banks and savings banks to online credit portals. In many cases, the residual debt insurance offered is not the best choice.

Instead, the consumer advice centers and the BdV recommend alternatives such as needs-based term life insurance or occupational disability insurance. These options often offer better protection for extensive financing and integrate better into employees' existing legal protections.

Termination and revocation

Consumers who have already taken out residual debt insurance should know that termination is usually possible. However, the contractual deadlines must be observed. The termination or revocation of residual debt insurance should be treated independently of the loan agreement. You have the option of revoking the contract within 14 days of completion; For contracts with death benefit protection, a notice period of 30 days applies. For older contracts concluded between 2018 and the end of 2024, a reference to the right of withdrawal is also required, which will no longer apply from January 2, 2025. 

The recommendations for termination include doing so by registered mail. In many cases, consumers can also get a portion of the premiums paid back. To ensure there is no unnecessary insurance coverage, consumers should regularly review their existing policies.

The tax aspect should also not be neglected: many insurance policies are tax-deductible as special expenses. This also applies to church tax. A tax calculator from the Federal Ministry of Finance is available to provide support with tax returns and helps consumers to keep their financial obligations better under control.