Credit life insurance: what it covers, what it costs and when term life insurance fits better.

How credit life insurance works

Credit life insurance is loan protection: an insurance policy whose benefit is tied to one specific loan. The core is death cover, legally a form of life insurance. If the insured person dies, the insurer pays the outstanding balance to the bank, and the surviving family keeps the property without the loan. Depending on the tariff, modules are added that cover the monthly instalments for a limited time during occupational disability or involuntary unemployment.

It is almost always sold at the point of the loan: the bank or credit broker offers it in the same appointment, frequently as accession to a group insurance contract the bank holds with an insurer. You are then the insured person, while the bank is policyholder and beneficiary at the same time. The premium is often not paid monthly but added to the loan amount as a single payment and financed along with it. Exactly this construction decides the cost, more on that below.

Credit life insurance is widespread mainly on consumer loans. On German mortgages we rarely see it as a bank condition in our brokerage work; the usual expectation there is simply that the death of a main earner has been provided for at all. How much needs to be covered at any point in time is shown by the repayment schedule of the annuity loan.

Mandatory or not: what the bank may require

There is no statutory obligation to take out credit life insurance, neither on a consumer loan nor on a mortgage. The bank may, however, make a residential mortgage conditional on insurance cover. That is governed by Section 492b (2) BGB: such a tying arrangement is permissible if the borrower takes out a relevant insurance policy and is allowed to take out this insurance with a provider other than the one preferred by the lender. The bank may demand the cover, but not dictate the provider. You can therefore meet a required death cover with your own term life insurance.

For consumer loans the legislator has drawn a second guard rail: the insurer may only conclude a credit life insurance policy relating to a general consumer loan if your contract declaration was made at the earliest one week after the loan agreement was signed; a breach renders the insurance void (Section 7a (5) VVG). The week's distance is meant to detach the purchase from the pressure of the loan appointment. Important for buyers: by its wording this one-week rule applies to general consumer loans, not to the mortgage loan itself. On a mortgage, Section 492b BGB with its free choice of provider remains your stronger right.

In practice this means: if an offer requires cover, the comparison includes not just the rate but also the question of which policy you use to meet the condition. The same household calculation that decides the instalment also has to carry the insurance premium.

Financed premiums and the commission cap: what the policy really costs

The premium of a credit life insurance policy depends on age, loan amount, term and the chosen modules; the disability and unemployment modules make the cover noticeably more expensive than pure death cover. The bigger lever, however, is the payment method. If the premium is financed as a single amount, it increases the loan, and you pay borrowing-rate interest on the premium for the entire term. An example using the assumptions of our other guides, a 3.5 per cent borrowing rate and 2 per cent initial repayment until full repayment after around 29 years: a financed single premium of 4 per cent of the loan amount costs around 6.4 per cent of the loan amount over the term, interest included. The premium grows to roughly one and a half times its size before a single benefit has been paid.

How strongly distribution has earned on these policies can be read from the law itself: since the legislator intervened, the acquisition commission for brokering a credit life insurance policy may not exceed 2.5 per cent of the insured loan amount (Section 50a VAG). The reference figure is the loan amount, not the premium. A cap at this level only becomes necessary where more was paid before; it explains why the policy is offered so reliably in the loan appointment.

The third mechanic concerns comparing offers. The effective annual ratemust include all costs that are a condition of the loan being granted; insurance that is not a condition stays out (Section 16 (3) and (4) no. 2 of the German Price Indication Regulation, PAngV). A bank that makes the policy a condition shows it in the effective rate. A bank that sells the same policy as "voluntary" shows a lower effective rate at the same real burden. Compare offers only with the same configuration: either both with cover and its costs, or both without.

Term life instead of credit life insurance: the honest fork

The core risk that credit life insurance covers can also be insured differently: with term life insurance (Risikolebensversicherung). It is a free-standing contract, independent of bank and loan, with a freely chosen sum insured and free choice of beneficiary. For a mortgage, the variant with an annuity-style decreasing sum insured fits: it follows the repayment schedule and insures at every point roughly what is actually still owed. How quickly that sum falls is shown in the table with our standard assumptions, figures in per cent of the original loan amount:

Assumption: borrowing rate 3.5 per cent over the whole term, monthly instalment, no unscheduled repayments. Own calculation ME Finance, rounded.

A policy with a constant sum insured covers, in this example, around 39 percentage points more after 15 years than is still owed, and you pay for that headroom year after year. The decreasing sum avoids it. It is paid monthly or annually instead of financed, the beneficiary is your family instead of the bank, and the contract survives a refinancing because it is not attached to the loan.

The honest flip side: term life insurance requires a health check. Anyone who fails it due to pre-existing conditions, or passes only with high surcharges, finds in credit life insurance, with its often absent or simplified check, cover that would otherwise not be available. That is its legitimate place. With the add-on modules for disability and unemployment, by contrast, the conditions belong under scrutiny: waiting periods, benefit durations and exclusions, for example for existing illnesses or fixed-term employment, are a matter of contract and decide whether anything is paid at all when it matters. Read those clauses before signing, not after.

Withdrawal, termination and early loan repayment

If you signed in the loan appointment and see it differently later, you have time: as life insurance, the policy carries a 30-day right of withdrawal, which only expires at the latest 24 months and 30 days after the contract was signed (Section 152 VVG). The decision can therefore still be corrected well after signing; premium shares for the time after the withdrawal must be refunded.

Alongside that stands termination. With running premiums you can terminate at any time with effect from the end of the current insurance period (Section 168 (1) VVG). With financed single premiums, the policy conditions govern the route; a refund of the unused premium share is market practice. Ask for the refund amount in writing before terminating. The most important occasion is often missed: the early repayment of the loan, for example on a sale. When the loan ends, the insurance tied to it is no longer needed; the refund belongs in the same calculation as the early repayment penalty.

What actually needs covering when you buy

The coverage question comes before the product question. If the instalment depends on two incomes, or on one main earner, the death risk belongs covered, at the level of the outstanding balance and for the duration of the financing. If a household carries the instalment from one income with a wide margin to the 35 per cent ceiling, as described in our guide How much house you can afford, existing assets can close the gap in individual cases. Protecting your ability to work, the risk of being permanently unable to earn, is usually the bigger gap than the death risk; whether a module of a credit life insurance policy is enough for that, or a free-standing solution is needed, belongs in a consultation with a licensed insurance intermediary or adviser.

To be clear about our role: ME Finance brokers property financing, not insurance. In the financing consultation we still raise the coverage question, because the instalment has to stay sustainable over a long fixed-interest period, even when life changes. What we do not do: recommend a policy we earn on. That distinguishes advice from the sale in the loan appointment.

What to take away from this guide

• There is no obligation to take out credit life insurance. The bank may require relevant cover, but must allow a free choice of provider (Section 492b (2) BGB).
• Financed single premiums are the cost driver: in the example, 4 per cent of the loan amount becomes around 6.4 per cent over the term.
• The commission cap of 2.5 per cent of the insured loan amount (Section 50a VAG) shows how strongly distribution has earned on these policies.
• Only insurance made a condition of the loan appears in the effective annual rate (Section 16 PAngV). Compare offers only with the same configuration.
• Term life insurance with a decreasing sum covers the same death risk precisely and usually at lower cost; credit life insurance has its place where a health check would not be passed. Withdrawal: 30 days, at the latest until 24 months and 30 days after signing (Section 152 VVG).

ME Finance is not a bank and not an insurance intermediary. We compare offers from more than 500 banks and lenders and price required cover into the total cost, so that offers become comparable. How we work is described on our mortgage page. We take your key figures through our no-obligation enquiry.