Taking out residual debt insurance – is it worth it?

The residual debt insurance is an insurance that is also referred to as residual credit insurance or credit life insurance and is referred to as RSV for short. The purpose of residual debt insurance is to protect the borrower or sometimes his or her surviving dependents from the consequences of borrowing. The protection within the residual debt insurance is variably compatible. This means that a residual debt insurance against death, but also against illness or unemployment can be taken out. In relation to the lender, the residual debt insurance is very good protection in the form of additional credit security. For this reason, residual debt insurance is often ceded to the lending banks when borrowing. In Germany, residual debt insurance accounted for 2.9 percent of the total insurance sums in 2009. The average amount of residual debt insurance in Germany in 2009 was 11,600 dollars.

The importance of residual debt insurance

The importance of residual debt insurance

The residual debt insurance can be taken out by the borrower as well as by the lender. If the lender takes out residual debt insurance, this agreement is made at the borrower’s expense. The protection can be against death, illness and incapacity for work as well as unemployment within the credit period. The insured person is always the borrower. In the event of the borrower’s death, the insurance will assume the remaining debt from the loan taken out. This means that the insurance company will repay the remaining credit. In the event of illness or unemployment, the insurance company pays the installments until the borrower may be financially able to meet the loan again. The residual debt insurance is usually concluded within a group insurance contract instead of an individual insurance contract.

Residual debt insurance, also known as RSV in technical jargon, originated in the United States in the 1950s. The first contract of this kind was approved in Germany in 1957 by the Federal Insurance Supervision Office. In the case of installment loans and annuity loans, the RSV is usually concluded against the payment of a single contribution, which in turn is included in the loan. In the case of current account or revolving loans, the contract is such that the current outstanding balance is determined each month and that the contribution for this outstanding balance is calculated for the current month. Different forms of protection against other risks exist today. The classic of residual debt insurance was protection against death and incapacity to work.

This was supplemented in 1995 when insurance against unemployment through no fault of its own was included. The residual debt insurance was supplemented in 2006, when serious illnesses such as cancer, heart attacks or strokes were also included in the benefits catalog of the residual debt insurance. For this purpose, assistance services, so-called assistances, were used to support the borrower to reintegrate into working life.

Thus, the protection within the residual debt insurance has been greatly optimized over the years of its existence. This is also important because a bank customer has a long repayment obligation to the bank when taking out a loan. It is therefore inevitable to consider what happens in the event of an illness, accident or even death of the borrower. In the event of death in particular, the heirs are automatically obliged to repay the loan together with the heir. Experts recommend considering taking out residual debt insurance from a loan amount of 8,000 to 10,000 dollars. An alternative to the residual debt insurance can be to overwrite an existing risk life insurance for protection. However, life risk insurance only pays in the event of death, so only covers survivors in the event of a loan default.

In addition, borrowers can also check their existing occupational disability insurance to determine whether there is sufficient coverage for the repayment of installments in an emergency. As a rule, most providers of installment loans have the residual debt insurance in a package with the loan for the conclusion and usually the providers also insist on the conclusion of a residual debt insurance before the conclusion of the lending business, unless there are adequate alternatives.

Criticism and disadvantages of residual debt insurance

Criticism and disadvantages of residual debt insurance

The consumer advice center often criticizes the amount of the premiums for the residual debt insurance and the coupling of lending with the residual debt insurance as a sales method. Often, taking out residual debt insurance involves relatively high commission amounts for the credit intermediary or the clerk at the lending bank. These not inconsiderable costs have a noticeable impact on the total cost of the loan for the borrower. Borrowers should also bear in mind that only a few banks take out residual debt insurance to improve credit scoring. If the lender prescribes the conclusion of the residual debt insurance so that a credit transaction takes place, then borrowers should make sure that the costs for this insurance must be legally binding in the annual percentage rate.

As a rule, it is up to the borrower to take out residual debt insurance with most providers. Nevertheless, the residual debt insurance is often advertised aggressively in order to earn final commissions. Residual debt insurance has to take further criticism with regard to the contractually fixed cut-off periods for the benefits. Some require that insurance coverage only comes into force after a contractually stipulated period has expired. Here experts speak of a so-called waiting time. Furthermore, some insurance contracts include a so-called waiting period, which means that unemployment or incapacity to work must exist for a certain period of time before benefits can be claimed.

Advantages of residual debt insurance

Advantages of residual debt insurance

An important advantage that exists with the residual debt insurance is that, unlike the individual insurance, there is no acceptance or health check. This ensures fast and uncomplicated insurance protection. Policyholders should, however, take into account that the vast majority of insurance claims due to the existing medical conditions known and existing at the time of conclusion are excluded from the benefit within the first two insurance years of the residual debt insurance. Protection in the form of residual debt insurance for existing pre-existing conditions in this time frame is either limited to the so-called non-pre-existing conditions, as well as reasons for the inability to work or the cause of death. In addition, residual debt insurance is a purely private law protection against the risks of unemployment through no fault of your own.

Important aspects of residual debt insurance

Important aspects of residual debt insurance

The insurance premium is payable with the residual debt insurance within a one-off amount together with the conclusion of the credit contract. The contribution is added to the loan amount. This automatically increases the cost of the loan. One should note the sum insured that comes into play when taking out residual debt insurance. Especially with long terms of the insurance and the loan contract, this can result in an enormous increase in the cost of the loan. Other providers provide protection that is too low for the loan amount. Experts therefore recommend that the content of the residual debt insurance be checked carefully.

The rule says that as a borrower, you should reject the offer if the costs take up more than ten percent of the loan amount. In addition, borrowers should ensure that if the bank takes out a residual debt insurance with a single premium, there is an obligation to include the resulting costs in the effective interest rate. If you decide to take out residual debt insurance, reading the fine print is essential. Protection can be excluded from the outset by the insurance company in the case of various previous illnesses. Other contracts only take effect when a three-month waiting period has been exceeded. It is also important to know that there is no insurance for protection against unemployment if the borrower cancels his or her employment contract or if this already existed for a limited period when the residual debt insurance contract was concluded.

In all of these cases, the meaning of taking out residual debt insurance may prove questionable. An alternative could then be for the borrower to pay the amount that would have been due for the policy into a savings plan. This allows the borrower to secure important reserves and, in the best case scenario, saves him the opportunity to redeem the loan early.


More expensive credit card purchases abroad

I was surprised (and scared) by the news that the government increased the IOF for credit card purchases abroad. And for those who think the increase was small, it is better to hold on to the chair: it went from 2.38% to 6.38%.

To get an idea of ​​the impact of this increase, if your card bill closed with the dollar at $ 1.70, after the IOF (Financial Transactions Tax) would be $ 1.81 .

The purpose of this article is to briefly explain what the IOF is, why the government has raised it to this level, and to discuss alternatives for making purchases abroad, taking into account the current situation.


What is IOF?

credit cards

The IOF is the tax on financial transactions or, as described on the IRS website, is the Tax on Credit, Exchange and Insurance Transactions, or related to Securities.

In other words, when we use credit (either through credit card or financing), buy or sell foreign currency, or take out insurance (life, auto or health), we are paying IOF. However, it is important to note that, for each of these operations, the IOF rates are different.

Like the IPI (tax on manufactured goods), II (import tax and IE (export tax), the IOF is an extra-tax. This means that its main function is not tax collection but economic control). No wonder the government reduced the IPI after the 2008 crisis to encourage consumption and maintains the IE rate at 0% over several years.


Why did the government raise the IOF?

credit cards

The main objective is to curb Brazilian consumption abroad. Last year alone, we left more than $ 16.4 billion out of the country. This is because the combination of cheap dollar income growth favors outbound travel and imported purchases over the internet.

The major concern is the deficit in the relationship between what Brazilians spend abroad and foreigners spend here, which has been growing year after year. Thus the national economy no longer receives good money and the government tries to contain this movement with this increase.


So how to shop overseas?


As the government raised the tax exclusively for purchases made with credit cards abroad, as can be seen in Decree 7,454 / 2011, we have some far more attractive alternatives: buying cash or using debit cards such as Visa TravelTree .

The great advantage is that this increase does not affect the purchase of foreign currency or debit card withdrawal operations, for example, which continue to suffer only 0.38% .

Last December I wrote the article “How to Buy Dollars for Travel,” where I pointed out the advantages and disadvantages of each alternative to buying dollars and already highlighted the higher IOF rate for credit card transactions. Now, with the tax rate at 6.38%, the disadvantages only increase.


What is the best way to buy dollars for travel?

What is the best way to buy dollars for travel?

I have already made my opinion clear in the article “How to buy dollars to travel” and, with this new increase, I still advise against using credit cards. But do you think so too? Leave a comment with your opinion!