Procedure of term life insurance in case of death

Hello forum,

my wife and I want to secure our joint (50/50) loan with term life insurances (RLV). Our lender has made us a seemingly attractive offer for two people "crosswise." Each individual RLV covers the entire loan amount, with the sum insured adjusted annually based on the outstanding balance. Additionally, the payout is always 15% above the sum insured to cover any prepayment penalties. Sounds somehow "tailor-made," but maybe that's also exactly a disadvantage. The beneficiary of both RLVs is the lender, by the way.

Please correct me here:
Assuming I die after 6 years. The debt at that point is still 300,000 EUR. My wife's RLV (on my life) pays the lender 300,000 EUR + 15%. Now it is questionable whether "my death" is sufficient to trigger an extraordinary termination of the loan, but the bank tells us that it would withhold the 300,000 EUR, deduct the prepayment fees from the additional 15%, and transfer the remainder to my wife. Sounds good, but I suspect there are situations in which the bank does not want to terminate the loan. In such a case, I would hope the full 300,000 EUR + 15% would be passed on to my wife. However, it is the lender’s decision.
Again, assuming the loan is terminated and the RLV settles the outstanding balance and fees. The debt after the 7th year would then be 0 EUR.
"My" RLV (on my wife’s life) will have been inherited by my wife or my descendants (with my wife’s consent). But since the balance is 0 EUR, this RLV, as I understand it, terminates automatically. Again, this was not our decision. However, if the payout from the first RLV had been passed on to my wife, then my heir could benefit from my contract. If now my wife dies, he would receive the payout from my RLV and additionally have my wife’s invested assets. Since the insurance here would have to pay out almost twice, I assume that in case of my death an extraordinary termination occurs immediately, and it remains a single payout.

In contrast, I now consider two regular RLVs with a third-party company. There, I would probably manage to have the sum insured decrease similarly to our outstanding debt (by specifying a repayment-free period, total interest rate, total repayment rate).
The sum insured of 300,000 EUR goes to my wife, and SHE can now decide whether to "invest" the amount and pay the monthly loan installments with it or try to obtain a termination.
Furthermore, "my" RLV is inherited. Although the real debt has already been repaid, this RLV would pay my heir the then theoretically outstanding loan amount upon my wife’s death – so the heir would still benefit in this construction. Am I wrong?

The four RLVs mentioned here are all comparably expensive. The lender’s version will clearly cover the outstanding debt best but also takes away our decision-making scope. The third-party version does not cover the prepayment fees but offers room for decisions.

And finally: what does one actually do as a survivor with the RLV payout? Do you really pay off the debt and prepayment penalties, or do you invest the money and continue paying the regular installments?

So, that was long, but I hope it is understandable nonetheless. Thanks for feedback on my thoughts!

Rosinanthe

In my opinion, the RLV is set too high.

If the insurance really comes into effect, the other person can still work and pay off the house normally. Why should the house have to be paid off all at once just because the other person dies? And why also the prepayment penalty? Savings account with 0% interest and the loan agreement continues until the normal special termination option.

In my opinion, the RLV should compensate for some of the income loss and cover things like additional childcare costs, especially since there is also the orphan's pension.

Your option sounds nice, but it "goldens" the death of the other person.

So we just took out term life insurance policies last week. With a fixed sum, namely half of the loan. We feel quite comfortable with that.
If the case should occur that something happens to one of us soon, the debts are not gone, but it can bridge quite a bit of time until the children are out of the worst and the remaining person can work full-time again.
At some point, the payout exceeds the remaining debt. But then it is also nice if the family is taken care of.

The complicated variants are difficult to calculate (since many possible scenarios and a small number of customers in the portfolio). Go to a large direct insurer and take out two completely standard insurances with policyholder = insured person. They sell thousands of these every week, and they know the risks very well and have a very attractive price.

You have a security first, which is already great. The amount is also absolutely fine. The outstanding debt plus X is always paid out. It is questionable whether death is a justified reason for early termination. You have correctly recognized that the bank does not have to allow a termination here. So what should be done then? Take the [RLV] money and set it aside and use it to service the loan. Also make additional repayments. You are worrying too much.

The complicated variants are difficult to calculate (due to many possible scenarios and a small number of customers in the portfolio). Go to a large direct insurer and take out two completely ordinary insurances with the policyholder = insured person. They sell thousands of these every week and know the risks very well and have a very attractive price.

However, it can happen that inheritance tax must be paid on the amount, depending on what else is being inherited.