When it comes to consumer credit, the insurance companies in this sector are increasingly involved. After all, residual debt insurance has long been standard practice for many loans. However, the consumer advocates in Germany have now sounded the alarm. Because in their opinion these are usually overpriced.
What is a residual debt insurance for a consumer credit?
Before we go into the detailed criticism of the consumer advocates, we first look at the residual debt insurance in detail. It is well known that after taking a consumer credit, one or the other can get in the way, which prevents repayment of the loan. Be it a serious illness or job loss, there are no guarantees in life. But who takes up a loan, of course, has to repay it. In the cases mentioned, the residual debt insurance now jumps in. If the consumer becomes insolvent, the insurance takes over the loan. Incidentally, this also applies to the death!
Bundesverband der Verbraucherschuetzer: Remaining debt insurance overpriced
By now, residual debt insurance for consumer credit in Germany has long been part of everyday life. According to current calculations by the Association of Consumer Organizations (VZBV), just under 2.5 million corresponding contracts were signed in 2017 alone. On average, the sum insured was just over 10,000 euros. However, these insurance policies are too expensive – according to VZBV. A current position paper of the consumer advocates states: “Remaining debt insurance policies are overpriced products with incomplete insurance coverage, some of which are sold in a dubious sales context.” A question from Alliance 90 / The Greens in the Bundestag revealed that in 2015 there were around 5,000 insured events in which insurers stepped in. The share was just 0.3 percent!
The detailed criticism of consumer advocates
According to the consumer advocates, the residual debt insurance is a voluntary addition to the loan agreement. However, according to consumers, consumers would often be told that a loan agreement would only be concluded if the hedge was additionally completed. Thus, many borrowers enter into two separate contracts that are independent of each other, without being aware of it. In addition, the insurances offered are sometimes only equipped with a patchy protection. The Federal Association of Consumer Advocates cites as examples:
- The death benefit relates only to illnesses that occurred after conclusion of the contract.
- In fixed-term employment, unemployment insurance does not apply.
- When terminating a permanent employment relationship, the protection of the insurance often takes six months!
- Inability to work mental reasons usually play no role.
Banks secure additional income
But it is not just the scope of benefits that consumer advocates see critically. The amount of agency fees is therefore critical. According to VZBV, the premium is even at 80 percent. Already years ago, the Nuremberg Regional Court classified a residual debt insurance of 15.6 percent as alarmingly high. Likewise, the actual costs are often unclear. Because the settlement of the amount of the residual debt insurance takes place as a one-time payment. Nevertheless, it is usually added to the sum insured. Thus, the one-time amount increases the loan amount. This allows the bank to collect additional interest income that is borne by the customer.
Federal Government wants to limit final commission
However, the Federal Government wants to intervene here. The final commission should be capped at this point to a maximum of 2.5 percent of the insured sum. At least this is what the Federal Ministry of Finance plans to do. However, such a legal regulation is not necessary in the view of the Deutsche Kreditwirtschaft (DK). Because the banks in Germany had recently published a commitment to more cost transparency. Andreas Krautscheid, chief executive of the banking association, said: “We are convinced that these measures are suitable to improve the credit insurance in many aspects and to provide the best possible consumer protection, without the need for a new legal regulation. The residual credit insurance has its justified place in the product range of the banks and savings banks. “
However, it was important that the remaining credit insurance in a needs-based advice tailored to the customer needs. In the opinion of the DK, a flat-rate statutory limitation of the insurance premium in relation to the credit does not meet individual customer needs. Because this does not only depend on the individual risk of the credit / policyholder. But also from the respective hedging level.
By the way, residual debt insurance does not play a major role in mini- loans and microcredits in Germany. But since the periods of the loans are very short, such insurance would make no real sense.