Credit insurance
Anyone who takes out a loan generally enters into a long-term financial commitment. Especially with installment loans, but also with mortgage financing and car loans, the bank will in any case require timely payment of the loan installments. Good creditworthiness is always advantageous for this.
But what happens if "something comes up", i.e., if an external circumstance causes you to be unable to pay your loan installments to the bank on time?
Below we therefore discuss the—repeatedly—current topic of credit insurance.
Repayment at risk? Consider credit insurance?
One existing risk is, for example, a sudden dismissal from work and the resulting unemployment. When contemplating whether to take out a loan, people usually weigh the pros and cons, but only a few consider the possibility of unemployment.
Especially today it has become very difficult to say with certainty whether a job is truly secure or not. Credit insurance often serves as protection in the event of job loss. In this way, a payment default by the policyholder can be avoided by the credit insurer.
How quickly a job that seems secure today can disappear tomorrow for operational reasons is something many have probably observed in their immediate surroundings. As a result of job loss, a borrower's obligations to the bank can quickly go unpaid.
Illness as a risk
Another example of a circumstance that in many cases could lead to payment problems or a payment default is that the borrower, due to illness or accident, is no longer able to pursue their regular gainful employment.
To guard against the problems mentioned above, the conclusion of credit insurance is recommended with most loans. As a rule, two types of credit insurance are recommended.
The first type of credit insurance covers the risk of death, illness or occupational disability of the policyholder. If the borrower dies, becomes ill or has an accident, the credit insurance assumes the claims, for example by covering the payment of installments or by repaying the loan in a single sum.
The second type of credit insurance is generally designed so that, in addition to the risks of illness and accident, it also covers the problem of possible unemployment. If the borrower becomes involuntarily unemployed during the term of the loan, their installment will be taken over by the insurer or credit insurer and no payment defaults will occur.
Costs of credit insurance
The protection of credit insurance is of course not free. To provide insurance coverage, credit institutions always work with insurance companies. These then charge a premium, which may be somewhat lower due to the number of applications the provider handles, but they do not work for free.
The costs for credit insurance are usually charged in a single installment at the beginning of the loan term — typically the loan amount is simply increased by the cost of the credit insurance.
Anyone who takes out a loan or intends to do so should individually consider whether taking out credit insurance is a sensible addition to the loan.
Types of credit insurance
For every policyholder, whether a private individual or a company, there is suitable credit insurance. Below are some examples of credit insurance types:
- Trade credit insurance
- Residual debt insurance
- Investment goods credit insurance
The trade credit insurance is intended to protect the lender or the supplier. If a claim, service or goods delivery fails, the creditor is covered. The supplier extends a supplier credit to the buyer for the purchased goods. Payment for the goods or the supplier credit is usually made only after receipt of the goods. The supplier therefore bears the risk of not receiving payment. In this situation, a company can protect itself with trade credit insurance or bad debt insurance. The residual debt insurance serves to protect the borrower, but also the family, in the event the borrower dies during the loan term. Survivors are thus protected by this insurance. The investment goods insurance is a special form of trade credit insurance.