What is credit protection insurance?

When you borrow money to finance your projects, you’re also committing to paying it all back. Unfortunately, sometimes things happen in life that prevent you from being able to do so, passing the debt burden onto your family. Credit protection insurance (CPI) is an effective solution for ensuring that your loan is repaid in the event of death or incapacity. Here’s all you need to know.

CPI is a form of decreasing term life insurance that insures all or some of the outstanding debt from the risk of death or incapacity. More precisely, the insured amount is set when the loan agreement is signed and decreases over the loan term, i.e. in line with the frequency of your repayments. If the recipient passes away or is incapacitated, the payment of the outstanding balance to the beneficiary is covered by the insurer. Generally, the beneficiary is the bank that granted the loan, but it can also be your partner or children, for example.

Like any insurance product, the benefit of CPI is the protection it offers against certain risks, as well as the peace of mind provided to you and your family. It’s therefore an effective solution for protecting your loved ones in the event of death, and means the property won’t have to be sold to cover the debt. CPI also offers tax benefits, which we’ll come back to.

Even though it’s not a legal obligation, financial institutions offer it – and even make it a condition – of a home or personal loan. For personal loans, “endowment life insurance” is used. Note that if the bank makes this a condition, you’re free to sign a policy with the insurer of your choice.

You can choose to take out insurance to cover death, total or partial incapacity, or even loss of earnings following redundancy.

What solutions are available?

There are almost as many CPI options as situations that could result in a partial or total inability to repay your loan. Read the conditions of your insurance policy closely. In addition to protecting yourself against the risk of death, you can also take out insurance to cover total or partial incapacity, or even a loss of earnings following redundancy.

As well as the types of risks covered, CPI solutions also vary depending on:

• the number of insured persons. CPI can be taken out by an individual or multiple people, for example you and your partner;
• the amount insured and the portion of the loan this amount represents. You don’t have to cover the entire loan amount, and you and your partner can even set up different levels of coverage depending on your age and income. In the case of full coverage for each partner, the outstanding debt in the event of one of the partner’s death is borne entirely by the insurance company;
• the repayment term and frequency. You can opt for a single premium payment, or annual, quarterly, or monthly instalments.

How much does CPI cost?

There are so many different types of CPI that it’s impossible to present and compare costs. What’s more, the premium amount will also depend on you, your physical condition and your lifestyle. Your premium is calculated on a case-by-case basis, based on:

• the loan amount, term and interest rate;
• the number of insured persons and the percentage of coverage for each of them;
• your age, physical condition, employment, hobbies (e.g. extreme sports), habits (e.g. smoking) – in short, all of the factors that help determine the insured persons’ risk of death or incapacity. This is why a medical examination is also generally requested.

The maximum annual tax relief amount is €672 per dependent person in the tax household. If you decide to pay your CPI via a single premium, the maximum tax relief threshold may be raised to reflect your age and the composition of your household.

What are the tax benefits?

In addition to providing financial security for your loved ones, CPI offers income tax relief if you’re a Luxembourg (tax) resident. This will vary depending on your situation. The maximum annual tax relief amount is €672 per dependent person in the tax household (you, your partner, your children). Please note that CPI tax relief cannot be claimed on top of deductions for interest on personal loans.

If you decide to pay for your CPI via a single premium, the maximum tax relief threshold may be raised to reflect the age and composition of your household. As such, the tax authorities (Administration des Contributions Directes) state that:

• up to the age of 30, the threshold is raised by “€6,000, plus €1,200 for each child for which the taxpayer receives a child tax allowance”.
• over the age of 30, this limit is “increased by 8% per each year over the age of 30 at the time the insurance policy is taken out, without the amount of this increase exceeding 160% of the above-mentioned maximum limit”. More precisely, this results in a €480 increase (and €96 per child) per year between 31 and 49 years of age, and a maximum deduction of €15,600 for over 50s (without children), plus €3,120 per additional child.

Be careful when you calculate!

To complete our CPI overview, we’d like to highlight one last important point. As mentioned, you’re free to take out CPI with the insurer of your choice. This means you can bypass the firms suggested by your bank, and instead play the competition against one another to try to reduce your premium. Why not? However, think carefully before trying to obtain the lowest premium by reducing the amount covered by your CPI. Make sure you do so based on your aversion to risk, dividing coverage depending on each partner’s income.

It’s also worth taking some time to reflect before settling on full coverage, divided 50/50 between the two of you. In the event that one partner passes away, the household’s overall costs aren’t divided 50/50 – far from it. It’s generally advisable that you take out higher coverage, the breakdown of which will reflect each partner’s income. This is even more advisable if you take out a loan to purchase your primary residence. However, if the loan is for a rental investment, the level of coverage may be further reduced, as the loan repayment is covered by rental income. In this case, the death of one partner shouldn’t fundamentally impact your ability to repay the loan.

The choice is yours!