What is Residual Debt Insurance?
Quick Summary
Residual debt insurance (PPI) protects loan repayment in case of death, disability, or unemployment. It is often expensive and not always worthwhile. Consumer advocates recommend critical examination, as cheaper alternatives exist.
Definition in Detail
Residual debt insurance (also called Payment Protection Insurance or PPI) is protection for installment loans. It covers the following events:
- Death: The remaining debt is fully paid off
- Disability: Monthly payments are covered
- Unemployment: Payments are made for a limited time (usually 6-12 months)
Critical Assessment: Consumer protection agencies warn against residual debt insurance. It is often expensive, contains many exclusions, and is frequently sold without adequate explanation.
Cost Example: PPI Significantly Increases Loan Cost
| Parameter | Without PPI | With PPI |
|---|---|---|
| Loan Amount | EUR 15,000 | EUR 15,000 |
| PPI Cost (10%) | EUR 0 | EUR 1,500 |
| Financed Amount | EUR 15,000 | EUR 16,500 |
| Term | 48 months | 48 months |
| Effective Interest | 6.0% | 6.0% |
| Monthly Payment | EUR 352 | EUR 387 |
| Total Interest | EUR 1,896 | EUR 2,086 |
| Total Cost | EUR 16,896 | EUR 18,586 (+EUR 1,690) |
Result: The PPI costs EUR 1,690 more here – because interest is also charged on the insurance premium. This corresponds to a hidden markup of over 11% on the original loan amount.
Advantages and Disadvantages of PPI
Advantages
- • Family relieved in case of death
- • No health examination required
- • Easy to sign up with the loan
- • Protection also for unemployment
Disadvantages
- • High costs (5-15% of loan amount)
- • Many exclusion clauses
- • Waiting periods before coverage
- • Premium often financed with loan
- • High rejection rate for claims
Better Alternatives to PPI
Term Life Insurance
Much cheaper for death protection. A policy for EUR 20,000 often costs only EUR 3-5 monthly and offers more flexible protection independent of the loan.
Disability Insurance
Provides comprehensive protection for disability – not just loan payments, but your entire income. More important than PPI if you don't have disability coverage.
Emergency Fund
3-6 months of salary as savings can bridge loan payments during job loss. The money belongs to you and doesn't expire like an insurance premium.
When Can PPI Be Useful?
In a few cases, PPI can still be useful:
- 1High loan amount with family: For mortgages over EUR 100,000 with dependent family members, protection can be sensible.
- 2Term life insurance not possible: With pre-existing conditions, PPI can be an alternative as usually no health examination is required.
- 3Unstable employment: With high risk of job loss, the unemployment coverage can help – but check conditions carefully!
Frequently Asked Questions
How much does residual debt insurance cost?
Costs typically range from 5-15% of the loan amount as a one-time payment or spread across installments. For a EUR 10,000 loan, this can be EUR 500-1,500 – often these costs are financed along with the loan, which further increases total costs through interest.
Is residual debt insurance mandatory?
No, residual debt insurance is voluntary. Banks may not make it a condition for granting the loan. If you do not want it, you can decline or cancel within the withdrawal period (30 days).
When does residual debt insurance pay out?
Depending on the contract, it pays in case of death (the remaining debt is paid off), disability (payments are covered), or involuntary unemployment. Caution: There are often waiting periods and exclusion clauses.
What are alternatives to residual debt insurance?
Alternatives include: term life insurance (cheaper for death coverage), disability insurance (more comprehensive protection), building an emergency fund, or forgoing insurance for small loans.
Can I cancel residual debt insurance?
Yes, within 30 days of signing you can withdraw. After that, cancellation is possible at the end of the insurance year. With early loan repayment, the insurance also ends, and you are entitled to a proportional premium refund.
Legal Notice
Since 2022, strengthened consumer protection rules apply to PPI in Germany: 30-day withdrawal right, clear cost disclosure, annual cancellation right. With early loan repayment, you are entitled to a proportional premium refund. Status: February 2026.