Learn how to calculate the Residual Value in Home Life Insurance

Learn how to calculate the Residual Value in Home Life Insurance

Introduction

O life and home insurance It is a crucial component of financial protection for homeowners. This type of insurance ensures that, in the event of the death or disability of the insured individuals, the mortgage debt will be paid off, preventing family members from inheriting that liability. It is possible that after the loan amount has been paid off, there will be surplus funds—we refer to this amount as the “remaining balance,” and it is paid to the beneficiaries. In this article, we will explore in detail how this calculation is performed.

How is the remaining amount calculated?

The calculation of the remaining value of the life insurance and mortgage insurance It is nothing more and nothing less than the difference between the insured principal amount and the outstanding principal balance. In other words, in the event of a claim, the loan balance is paid off. However, it is common for the outstanding balance with the bank to already be less than the insured amount. In that case, the remaining amount is paid to the beneficiaries named in the policy, usually the legal heirs.

The Role of Amortization in Calculating Residual Value

Amortization refers to the process of repaying the principal of a loan over time. It is common for the insured principal amount not to be kept up to date with the outstanding balance at the bank. This adjustment is typically made automatically on an annual basis, so there may be some discrepancy. This difference is what we call the “remaining value,” which is paid to the policy beneficiaries in the event of a claim.

Remaining value as financial protection

We’ve already discussed briefly how the remaining principal amount is calculated, and we know that it results from a “discrepancy” between the insured principal amount and the loan principal. We also know that this difference is paid to the beneficiaries. It is therefore possible to use this remaining amount as a financial protection strategy for the beneficiaries. In other words, if you want your family to receive some extra money after the loan is paid off, you can choose not to adjust the principal amount, thereby always having an “extra cushion” of protection.

A practical example

Let’s imagine that the outstanding principal is 200,000.00€ and 10,000€ is paid off each year. After 10 years, a tragedy occurs. If you had opted for a traditional adjustment, the amount owed to the bank would have been €100,000.00 and the insured principal would also have been €100,000, leaving no surplus: the loan would have been paid off with the bank, but the beneficiaries would not have received any additional amount. If you choose not to increase the principal, the amount owed to the bank would be €100,000.00, and the insured amount would remain at €200,000.00. Thus, the loan amount was paid off, and the remaining €100,000 would be paid to the beneficiaries.

Conclusion

Understanding how to calculate the remaining coverage amount on a home life insurance policy enables better financial management, helping you understand the policy’s value and ensure adequate protection for your beneficiaries.

When making a life insurance linked to a mortgage Through EXS, you can save up to 60% compared to your current insurance or the policy offered by the bank.
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