Taking out a loan is not an easy decision for anyone. However, there is sometimes a need for financing that exceeds the financial possibilities of a normal household, such as buying a new car or buying a house. For these purposes, most have to apply for a loan from one of the many credit institutions.
As a rule, banks require appropriate protection for larger loan amounts, which can be linked, among other things, to life insurance. They form an alternative to a property that is usually already mortgaged. When the layperson speaks of life insurance, it means capital-forming life insurance. However, this can be any other unit-linked insurance that has a sufficient surrender value, such as certain pension insurance policies. These options for securing larger loans serve as a basis for borrowers to obtain more favorable terms than with so-called risk loans.
All credit institutions raise the interest rate on a loan if the loan request can only be insufficiently secured. In the case of smaller credit requests, the monthly income is more normally considered sufficient security for the granting of credit. However, this cannot apply to larger purchases or even the purchase or construction of a new home.
How is a capital life insurance composed?
Capital life insurance consists of insecure benefits, almost safe and secure benefits. The contractor must provide the safe and almost certain benefits through regular contributions. The agreed contributions must therefore always be paid until the contract is paid out. This is the only way to achieve the targeted capital. The insecure benefits are financed by the insurance principle, whereby the small number of claims for the insured event is covered by the many contracting parties who have not used the insurance benefits.
As a rule, the policyholder is offered a mixed life insurance policy that covers both a sudden death and the event of an event, i.e. the payment of the saved capital after a previously determined term. The mixed life insurance is linked to the fund and is preferred in many countries. There are also pure capital-building life insurance policies that do not apply in the event of death, but are geared towards the event of an experience. However, these are rarely completed.
Life insurance is often accepted as security
Usually the savings on the classic savings book are not sufficient to finance larger expenses. Unfortunately, there are few alternatives to borrowing. The first option would be to abandon the intended project or to postpone it until the financial means are sufficient to carry it out. However, few people bring so much patience.
However, there are also cases in which postponing the project is not an option. Then the necessary amount of money must be taken up with a bank. The first point of contact for most private households is the house bank. Here it is first checked whether the loan request can also be financed with a bank installment loan. However, an expensive interest rate can be charged here if the installment loan does not have sufficient security.
Advantages through collateral
If a borrower is able to show capital-building life insurance that has already saved a sufficient surrender value, this life insurance can be deposited as security for a loan. According to legislation, it is possible to borrow private pension insurance or capital life insurance from a surrender value of EUR 1,000. All types of unit-linked insurance policies can also be borrowed. However, the credit institutions lend the policies up to a maximum of 60 percent of the current fund balance.
With such collateral, a borrower can get more favorable conditions from the bank than if he turns out to be a risk repayer. A favorable interest rate lowers the total loan debt and also leads to a shorter term for the repayment of the loan. The banks have meanwhile organized the lending with the capital-forming life insurance very well, so that the customer can expect a quick processing of the application. Of particular interest here are the amount of the interest rate and the length of the term.
As soon as these facts have been established, offers from other banks, which may have more favorable terms, can also be obtained. But for this the borrower should always evaluate all the terms of the contract together and only then venture to compare them.
Self-employed people benefit from borrowing with life insurance
Taking out loans is not without its problems, particularly for the self-employed because, unlike civil servants or permanent employees, they do not have a regular income. That is why they are often not offered consumer loans, even though they urgently need these loans. In this case, a capital-building life insurance policy can provide the necessary security for a loan on reasonable terms that it might not otherwise be offered in the form.
In the case of life insurance with a correspondingly saved surrender value, for many credit institutions there is even no need to ask whether the borrower also has the desired credit rating. Depositing life insurance for a desired loan is the smartest alternative to an ordinary installment loan.
However, the legislature has enacted special regulations for private individuals when taking out consumer credit in order to protect them. Nevertheless, certain advantages can be secured compared to a common bank loan if the borrower has to offer a life insurance policy with a corresponding surrender value as collateral. In this case, he can negotiate a much lower interest rate than for a consumer loan.
Obtaining various offers is worthwhile
It is also worthwhile to obtain offers from various banks. There are banks that specialize in lending to life insurance policies and offer better terms than the house banks. Since the lender’s capital life insurance means that the risk that the loan will not be repaid is very low, the lenders grant the borrowers particularly favorable interest rates, since the policy serves as security. Some banks even loan the full surrender value of the policy. Most insurance companies, on the other hand, lend a maximum of 85 percent of the surrender value. Therefore, the policyholder should check with his insurance company about their credit terms beforehand.
Since an ordinary bank loan usually requires payment of prepayment interest on the loan, a loan in connection with a life insurance policy is much cheaper if it is to be paid off prematurely. A change in case law has brought an advantage to the consumer here. Loaning an insurance policy is a common procedure for insurers for their customers in order to create greater financial leeway in the short term.
For business people, this is more about investments or bridging payment deficits. The bank providing the loan is temporarily used as the beneficiary for borrowing. This gives the creditor the security that the borrower will not cancel the policy unexpectedly. However, a home loan should not be linked to capital life insurance. Consumer advocates warn of this. At first glance, this financing model resembles a normal building loan, but in retrospect this model proves to be disadvantageous for the customer.
If a customer knows that he wants to buy or build a house in a few years, he is advised to save capital life insurance now. As soon as he has found the desired property of his choice, he takes out a repayment-free loan for the financing. All he has to do is pay off the interest. The contract is then conditioned in such a way that the sum insured is paid out shortly after the age of 60 and with this payment, the loan is completely redeemed. This model is recommended by many consultants or a structural sales organization, but it proves to be the most expensive of all construction financing options. These models serve the merit of the consultant rather than the customer.
The same applies to similar combination models of credit and life insurance, in which the buyer or builder takes out a mortgage loan, but only pays the interest, but repays the loan amount through the payment by the life insurance. These models are justified with tax savings, but they no longer exist. That is why every financing model and every loan agreement should be examined before the conclusion.