The end of residual debt insurance: What it means for you

Highlights: Residual debt insurance often sold to you when you take out a loan. Supposedly so that you can pay the loan even if you get sick or unemployed. In reality, residual debt insurance is a bag tailoring by banks and insurance companies at the expense of their credit customers. In Germany, the insurance may only be taken out seven days after the loan, so that the suspicion does not arise that the policy is needed to obtain the loan. Currently around a third of all installment loans are sold with the lucrative insurances.

If you take out an installment loan, you are happy to be sold a so-called residual debt insurance - which is often nonsensical. Now it is to make it much more difficult for banks to do business. What this means for you.

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If you have already taken out residual debt insurance, you can get a lot of money back

Photo: Monika Skolimowska / dpa

Last week, as part of a law on the future of the financial markets, the traffic light finally heralded the end of classic residual debt insurance.

Expensive residual debt insurance

Residual debt insurance is often sold to you when you take out a loan. Supposedly so that you can pay the loan even if you get sick or unemployed. In reality, residual debt insurance is a bag tailoring by banks and insurance companies at the expense of their credit customers. And some car dealers have also spiced up the loan, with which they could sell the car better, with such residual debt insurance. As a result, the costs for an installment loan are currently increasing significantly, whereas in the past they often doubled.

As a result, credit has only been expensive for customers in recent decades. In 2017, the financial supervisory authority Bafin determined that at times 70 percent or more of the costs of residual debt insurance were only used for commission, i.e. never benefited customers. Memorize the number.

Learning from Great Britain

In the UK, residual debt insurance was the most expensive and biggest financial scandal of the past decade. Since 38, British banks have had to refund more than £2011 billion in premiums for such insurance to their customers – because of residual debt insurance that was unsuitable for customers. In 2014, a court ruled even harsher: A customer had to get the money back for the insurance because she was not told that more than 70 percent of her premium was spent on commissions

Class action lawsuits are currently underway by more than 300,000 customers to recover further money from banks and insurers by court order. In mid-November, the Supreme Court of Great Britain awarded money to a customer because a subsidiary of Citi Bank Group had sold contracts with a 2018 percent commission share in 95.

In 2011 – about a decade ago – the same Supreme Court had already assessed the appropriate antidote, without outright banning residual debt insurance. The High Court in London ruled at the time that such insurance could not be sold until one week after the conclusion of the loan at the earliest. Precisely to avoid any suspicion of a coupling of credit and insurance.

The background: Banks, credit intermediaries and insurers have long wanted customers to believe that such insurance is necessary. It is virtually linked to the loan. However, the coupling itself had long been prohibited by law. And the insured event was so rare that even British courts declared the policies to be bag tailoring.

Seven days of rest

The same rule is now to be introduced in Germany: The insurance may only be taken out seven days after the loan, so that the suspicion does not arise that the policy is needed to obtain the loan.

In order to achieve this, the parliamentarians of the traffic light have used the legislation on the Future Financing Act, after all, the new 7-day rule was already part of the coalition agreement. It is now laid down in Section 7a (5) of the Insurance Contract Act: The insurer may only conclude the contract if the customer has submitted "the contract declaration no earlier than one week" after the loan. If the insurer fails to comply with this obligation, the residual debt insurance contract shall be null and void." That means: money back.

The rule will apply to all insurance policies taken out after the law has come into force.

Outraged profiteers

Banks and insurers are outraged. If you can't sell the insurance right away with the loan, it's dead, wrote the Börsenzeitung, the central organ of Frankfurt's financial sector. Banks warned of a "collapse of the brokerage of residual debt insurance". The 7-day period, in which the customer can deliberate, "would in fact be tantamount to a sales and product ban," according to the banking association, to which Targobank, Santander, Teambank, Deutsche Bank and also ING belong.

Currently, around a third of all installment loans are sold with the lucrative insurances. At the end of 2022, the industry service Finanz-Szene wrote that the credit banks in this country are likely to have made around one billion euros in profit per year with the insurance policies. In 2022, Teambank, which belongs to the cooperative banks, transferred around 230 million euros in commissions to its cooperative banks alone, a large part of which was paid to residual debt insurance, according to a report by the Börsenzeitung für Restschuldversicherungen. Insurers have also earned handsomely in the past: "The insurers collect the premiums paid almost one-to-one as profits," wrote Finanz-Szene a year ago.

It is therefore hardly surprising that the Association of German Banks, in which the installment loan banks are united, and the German Insurance Association last weekend allegedly sought relevant EU rules against the new consumer protection. In a hearing of the Finance Committee of the Bundestag, however, the Federal Ministry of Justice had made it clear shortly before the law was passed that it did not share these objections. The financial supervisory authority Bafin also has no fundamental reservations about the new weekly rule.

Your options as a customer

If you need a loan now, you will normally no longer take out residual debt insurance after such information.

But what do you do if you have taken out such residual debt insurance with your loan in the past?

The easiest way to do this is if you have just taken out the insurance. You can then revoke the contract, usually for 30 days. Even if you want to keep the loan. You can also revoke the loan itself for 14 days, without justification.
Sometimes you can revoke the loan for much longer. For example, because the bank has not properly informed you about your right of withdrawal. The Hamburg Consumer Advice Centre will check for you whether the information was in order.
You can also cancel the residual debt insurance. The easiest way to do this is to reschedule the installment loan and look for a new bank. In this case, you have a special right of termination and can also terminate the insurance contract. However, you will probably need a new loan, which could cost more interest than the old one. At least if you got hold of a favorable interest rate during the low interest rate phase of the past. But due to the elimination of residual debt insurance, the rates will hopefully still be lower.
If the contract for residual debt insurance grants you an ordinary right of termination, then you can of course also terminate the contract ordinarily and save the insurance instalments for the remaining term. However, the commission, which is usually paid at the beginning, is then gone. If it's very high, let me know. We are always looking for examples at Finanztip.

HORSEPOWER: When I started at Finanztip, I looked at the UK with admiration. There, an organization called Money Saving Expert has taken up the cause of the end of residual debt insurance and has been denouncing the scam at the expense of British customers for a decade since 2011. In this way, the colleagues were instrumental in ensuring that customers got their money back. Over the past decade, the sums that British customers have received back have been higher than the profits that the major British banks have been able to report. This is consumer protection through information.