What do you need to know about credit insurance?

The term “credit insurance” refers both to protection for individuals against payment difficulties with loans and to protection for companies against default risks. Credit insurance shields borrowers from insolvency due to unforeseen life events like death, unemployment, or illness. Companies use credit insurance to protect themselves against the default of receivables, for example, in sales on account.

Depending on the provider, credit insurance for borrowers is also called “loan installment insurance”, “payment protection insurance”, or “residual debt insurance”. The most common types of credit insurance for borrowers in Switzerland include death risk, installment, life, legal protection, and identity theft insurance.

Although credit insurance offers additional security, it is associated with high costs and numerous exclusion criteria, which considerably limit its benefits. Credit insurance is, therefore, not worthwhile in most cases.

The scope of coverage, the cost-benefit ratio, and the specific exclusions and conditions in the contract are decisive when choosing a suitable insurance policy. Mistakes such as taking out excessive insurance or neglecting to read the small print can be expensive.

What is credit insurance?

The word “credit insurance” is used in two different contexts. On the one hand, credit insurance is insurance for borrowers who want to protect themselves in the event of payment difficulties. On the other hand, credit insurance is insurance for companies that want to protect themselves against the risk of default when granting loans or selling on account.

Credit insurance protects borrowers against insolvency if unfortunate circumstances cause their personal finances to deteriorate. In Switzerland, credit insurance in the event of death is mandatory with most providers, but additional protection can also be purchased anywhere on an optional basis, typically in the form of loan installment insurance. Lenders do not act as direct insurance providers but as intermediaries between borrowers and insurance companies, for which they receive commissions. The actual providers of installment credit insurance in Switzerland include Axa, Chubb, Helvetia, and Generali.

Credit insurance protects companies against the risk of default on a receivable as part of supplier credit, for example, for goods deliveries, work deliveries, services, or work performances. It comes into effect if the customer fails to pay after delivery or performance. Companies that grant their customers a grace period for payment insure themselves against the massive consequences of a possible loss with trade credit insurance. Commercial credit insurance is also known as bad debt insurance or del credere insurance, as it relates to the outstanding receivable and not directly to the goods delivered or services rendered.

What types of credit insurance are there for borrowers?

Various types of credit insurance are offered to borrowers in Switzerland. Some do not insure the loan directly but an area closely linked to the loan. Although the insurance policies provide additional security, the scope of coverage varies greatly. Below are 5 common types of direct and indirect credit insurance.

1. Death risk insurance
2. Installment insurance
3. Life insurance
4. Legal protection insurance
5. Identity theft insurance

1. Death risk insurance

Death risk insurance is a basic insurance often required when taking out a loan in Switzerland. It covers the remaining loan debt in the event of the borrower’s death so that the financial burden is not passed on to the heirs. The cover provided by this insurance is usually limited to a certain maximum amount, which varies depending on the provider but is generally between CHF 80,000 and CHF 100,000. It is important to note that certain causes of death are excluded from cover, such as those resulting from the practice of extreme sports (e.g., horse racing or martial arts).

With most lenders, the death risk insurance is integrated into the general credit costs. The cost is low as this insurance covers a standard risk.

2. Loan installment insurance

Loan installment insurance (payment protection insurance) aims to cover the loan installments in the event of unemployment, incapacity to work, or disability of the borrower. The exact conditions, such as waiting periods and maximum benefit periods, vary depending on the provider.

Payment protection insurance costs around 4% and almost 8% of the monthly loan installment. This insurance can thus make up a significant proportion of the total cost of a loan. The costs also depend on the borrower’s credit rating, with people with poorer credit ratings paying higher premiums.

3. Life insurance

In the context of loans, life insurance can be seen as an extended form of death risk insurance. Life insurance is also considered when checking creditworthiness and is viewed as collateral. Life insurance is an interesting option for borrowers who are looking for a form of retirement or health insurance in addition to loan protection.

The cost of life insurance depends on various factors, including age, health of the insured, sum insured, and the additional benefits selected. As life insurance policies can be individually configured, premiums vary greatly, but you can get good insurance offers starting at around CHF 100 per month from Allianz, for example.

4. Legal protection insurance

Legal protection insurance in the context of loans offers protection in the event of legal disputes in connection with the loan agreement. This includes, for example, disputes about the terms of the contract or the handling of payment defaults. Legal protection insurance is also extremely helpful in the event of attempted credit fraud.

The annual premiums vary depending on the scope of the legal protection but offer very good value for money compared to the potential costs of a legal dispute. Dextra Rechtsschutz AG, for example, offers comprehensive legal protection for only CHF 264 per year.

5. Identity theft insurance

Identity theft insurance is particularly relevant for credit cards or online loans, although it is not specifically designed for loans. The insurance offers protection against the financial consequences of identity theft, where fraudsters take out loans under the victim’s identity. The insurance helps restore financial security and covers the cost of legal advice, damage control, and even certain direct financial losses.

Costs for identity theft insurance are comparatively inexpensive. The annual fees range from a few dozen to a few hundred francs, depending on the level of cover and the services included.

Is credit insurance worthwhile?

In the majority of cases, credit insurance is not worthwhile for borrowers. The reason is that the costs are usually far too high. Added to this are the numerous exclusion criteria always incorporated in the offers. In general, we at Kredite Schweiz don’t recommend credit insurance.

There are cases in which credit insurance is nevertheless worthwhile, especially if it is combined with other insurance. For example, legal protection insurance not only helps with disputes relating to the loan but also with all other legal problems.

What should you look out for when choosing insurance?

If you want credit insurance, carefully examine the offer when taking out the policy to determine whether the insurance is actually worthwhile. Always pay attention to the following points.

• Scope of cover: Understand exactly which risks are actually covered. Not all credit insurance policies offer the same scope of protection. While some policies cover unemployment, disability, and death, others are limited to just one or two of these risks.
• Cost-benefit ratio: Evaluate whether the insurance’s cost is proportional to the protection it offers. It does not make sense to accept painfully high premiums, especially if the probability of an insured event occurring is low.
• Exclusions and conditions: Be sure to consider the specific exclusions and conditions of the policy, such as waiting and grace periods, maximum benefit durations, and amounts. These factors have a significant influence on whether the insurance is worthwhile.

What mistakes should be avoided?

When taking out credit insurance, there are several pitfalls to avoid to dodge unnecessarily high costs or being left without protection in the event of an insured event. The following points should be noted.

• Superfluous insurance: Avoid taking out insurance policies that offer protection for risks already covered by other policies or our Swiss social security systems.
• Insufficient information gathering: If you do not take enough time to compare offers from different insurers, you will quickly take out insurance with unfavorable conditions. Don’t forget that insurance salespeople are not always only interested in your well-being but also in the commission they earn from it.
• Neglecting the small print: Overlooking exclusion clauses and specific terms and conditions leads to nasty surprises. There are few things more frustrating than finding out that the insurance does not apply at the crucial moment. For example, unemployment insurance only applies if it is not your fault, and the unemployment insurance (ALV) pays you daily allowance benefits.

Can you cancel credit insurance?

Non-mandatory credit insurance policies can be terminated, subject to contractual deadlines and conditions. The notice period is usually one month or three months.

You should, of course, find out about the cancellation conditions before taking out the insurance. The insurance policy and the General Insurance Conditions (GIC) will help you to understand your rights and obligations. Contact the insurer directly or an independent advisor if you have any uncertainties or questions.

Is the insurance canceled in the event of debt restructuring?

When replacing an existing loan with a new one, i.e., debt rescheduling, it is good to understand the terms and conditions of the existing credit insurance. The insurance cover ends with the repayment of the original loan if the insurance is directly linked to the loan agreement. This means a separate insurance policy must be taken out for the new loan. It is advisable to clarify with the new lender and the insurance company how the transition can best be arranged to ensure seamless insurance coverage.

What happens if you can no longer pay the insurance?

If you find yourself in a financial emergency and can no longer afford the premiums for your credit insurance, please contact the insurance company immediately! In such cases, many insurers offer options for adjusting the insurance conditions, such as a temporary premium break or an adjustment to the scope of insurance in order to reduce the premiums.

Unpaid premiums, on the other hand, result in reminder fees being charged and, in some cases, insurance coverage being suspended. If you are already in financial difficulties, it is worth contacting a debt help center. Proactive communication and seeking solutions with the insurance company help to avoid such consequences. Swiss insurers are a lot nicer and more cooperative than most people assume.