How useful is it to take out a residual debt or unemployment insurance to protect the home loan? We show you what to consider and what other options you have.
- Why you should protect your home loan
- Protection through residual debt insurance
- Protection through unemployment insurance
- Alternatives for securing a home loan
- Conclusion: Insurance is a must for property owners
- Request advice on loan protection
Why you should protect your home loan against unemployment
Those who plan to buy their own property first assume their current living and income circumstances when financing their home purchase. Over the years, however, changes can occur that are not always foreseeable beforehand. One of the most drastic changes is unemployment. For homeowners, the associated loss of income has a direct impact on the home loan. If the loan installments can not be serviced over a long period of time, even the loss of the property threatens. If you are a property owner and want to insure yourself against the specific case of unemployment, you mainly have the following two options.
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Option 1: Protection through residual debt insurance
In addition to the death of the policyholder, residual debt insurance also covers incapacity to work and unemployment, if desired. If you as a policyholder become unemployed through no fault of your own and as a result can no longer afford the loan installments, the residual debt insurance steps in and takes over the installment payments for your home loan. This is done depending on the contract for a maximum period of 12 to 18 months.
Depending on the insurance case, however, waiting periods must be observed. In the case of unemployment, you should expect about three months. Only after this so-called grace period, the installments are taken over by the insurance. The bottom line is that the insurance only pays for a narrowly limited period of a few months.
The premiums of the residual debt insurance depend on the amount of the building loan. Many take out the insurance in conjunction with the loan with the bank, so that the insurance premiums are part of the loan payment. Sounds practical at first. The disadvantage, however, is that the loan amount increases in this way and thus also the construction interest rate. Therefore, it may be advantageous to take out insurance with another provider.
Option 2: Protection through unemployment insurance
The second way to protect one's home loan against the consequences of unemployment is to take out unemployment insurance (also called unemployment protection insurance), which is offered by some insurance companies. Also this takes over in the case of a job loss the repayment for the house loan for a maximum period of 12 months. In this case, the installments are secured up to a fixed upper limit.
But there are disadvantages here, too: In most cases, there is also a grace period of three months. To make matters worse, the insurance premium must also continue to be paid during this waiting period and during the time when benefits are being received.
Since both the residual debt insurance and the unemployment insurance only cover the installment payments for the home loan for a limited period of time, it is always important to weigh up in each individual case whether it might be better to invest the saved contributions in order to prevent salary shortfalls.
Alternatives for home loan insurance
The best advice is to plan for as many imponderables as possible right at the start of your financing and to take measures to secure your home loan yourself. Because then a temporary unemployment can also be bridged from their own funds.
- Plan reserves more generously: it is optimal to set aside a portion of your own capital right from the start. We recommend the sum of at least three to four net monthly salaries to continue paying loan installments in full for just under a year.
- Continue to build up money reserves: Even if you already have a sufficient reserve for emergencies, you would be well advised to increase it further, at least in the first few years after taking out the home loan. This way, you are better prepared against both loss of income and other unforeseen expenses.
- When taking out a home loan, look for flexible contract options: It's important to know your contract well and look for the most flexibility possible before you sign it. Of particular importance is the right repayment strategy: instead of overdoing it and choosing too high a repayment, you can, for example, agree on a repayment rate change in the loan agreement, which will help you to bridge a period without full income. A suspension of repayment is also possible. In case of emergency, play with your cards on the table and talk to your bank – even if you have not stipulated the possibility of changing the repayment rate in the real estate contract.
With our construction interest calculator, you can calculate various options and determine exactly how much, for example, a 1 percent higher repayment affects the term of your home loan, but also the amount of your monthly payment.
Conclusion: Insurance is a must for real estate owners
So, all in all, you have several options to protect your home loan against unemployment – the most common ones are residual debt insurance and unemployment insurance. Although each of them has its advantages and disadvantages, it is important that you use one of the presented options. Because even if we all wish never to lose our job, it can happen quite suddenly and then it is too late for the insurance. In addition to unemployment, there are of course many other reasons that can jeopardize the financing of your own property, such as illness or occupational disability. Insurance for property owners is therefore essential not only for families with children.