Granted – it’s a topic that people are reluctant to talk about. Surreptitiously displaced by many people up to a certain point of their own life and yet inevitably a topic to be dealt with: the passing away. Not only when it comes to making personal arrangements such as the will for the bereaved, but also on the subject of finance. Financial matters should be regulated in the event of death, in the form that any surviving dependents are free of charge. But what if this is not the case? For example, if the deceased still has one or more loans that are not fully paid at the time of death? Does the loan contract automatically end with the death of the borrower? In this aspect, what should be considered when concluding a loan? Which possibilities of protection exist? We followed these questions.
Loans can be secured in the event of death
In principle, the following rule applies when concluding a loan: The debt of the deceased remains in existence even after the death of the borrower. Like the deceased’s assets, they transfer to his heirs. The debt together with the funeral expenses and other existing receivables form the so-called estate liabilities. If there is no will, the statutory succession comes into force. With several heirs a heirs community is formed. In this case, the community of heirs is jointly and severally liable for the obligations of the deceased until the distribution of the inheritance in accordance with § 2058 BGB. However, none of the co-heirs must settle the claims from his private assets, but can refer the creditors to the estate. As far as the legal regulation. However, just so that the situation does NOT occur, there are ways to take appropriate safeguards already with the conclusion of a loan. On the one hand, the residual debt insurance known in other contexts or the term life insurance are available for this purpose.
Credit protection in the event of death: residual debt insurance or term life insurance?
If the borrower wants to ensure that his heirs are not burdened with his credit debts after his death, the first option is to take out residual debt insurance when the loan is taken out. In case of death of the borrower, the credit (residual) debt existing at the time of death is then settled by the insurance company. An impending financial burden on the heirs after the demise of the borrower is thus averted. The second alternative is the conclusion of a term life insurance. In the event of death, term life insurance is paid directly to the surviving dependents. This sum can then be used to pay off the outstanding amount of credit. The advantage of term life insurance is that, in contrast to residual debt insurance, the use of the sum insured is not tied to a specific purpose. As a result, there may be some leeway for using the money for the heirs.
Credit protection with term life insurance: this is to be considered
When concluding such an insurance, it is important to ensure that one or more persons are designated as contract beneficiaries in the contract. The sum insured will then be paid in full to this person (s) in the event of death. The beneficiary of the insurance contract may also be the heir, but this is not necessarily necessary. Furthermore, it is important to know that if a beneficiary is named in the insurance contract, the payment of the sum insured to the beneficiary will not be treated as inheritance but as a gift. Thus, there is also a tax benefit for the beneficiary.