On its surface, a credit card insurance policy seems appealing. For just pennies on every $100 in credit card debt, your debt will be paid if you lose your job, become disabled or die. Sounds great, right? But don't rush into accepting this form of insurance, as the cost may be too high for the actual value provided. Let's take a closer look at the facts:
What is Credit Card Insurance?
Broadly speaking, there are four main types of credit insurance:
- Involuntary Unemployment Insurance – Makes your minimum monthly card payment if you are laid off from your job. (There is typically a maximum coverage term, and you are not protected if you’re fired.)
- Disability Insurance – Makes your minimum monthly card payment if you are disabled. (Here also there is typically a maximum coverage term.)
- Life Insurance– Pays off your credit card balance in full if you die.
- Property Insurance – Protects the cardholder if merchandise purchased with the card is damaged, lost or stolen within a set term.
What Does Credit Card Insurance Cost?
Most credit card insurance policies cost between 80 and 99 cents per $100 in covered debt. Therefore, depending on your balance, that cost can add up quickly. For example, if you owe $5,000 on an insured card, your insurance premium can approach $50 per month. That's nearly $600 per year!
What do you get for your insurance?
For the most part, credit card insurance offers little but headaches. Generally speaking, your policy will only pay your minimum payment due each month, while your card continues to rack up interest charges. In such a case, you would probably have been better using the money you spent on insurance to pay down your credit card balance.
Before accepting credit card insurance, read the fine print. Check out exactly what benefits will be paid to you and under what circumstances. Also, make sure there isn't a cap on the amount of insurance money you will receive. It won’t do you much good if your insurance benefits are cut off and you’re still stuck with thousands of dollars in unpaid credit card bills.
In most cases, it's completely unnecessary
If you're considering credit card insurance to protect your family in case you die, think again. If you already have a good life insurance policy in place, then credit card insurance isn't even necessary. However, if you are not protecting your loved ones with life or disability insurance, start shopping around. Life insurance and/or disability insurance can provide superior value and protection than credit card insurance.
To buy or not to buy?
If you are carrying high credit card debt and fear you may lose your job soon, you may decide that credit card insurance is the protection you need. If this is the case, do your research and avoid falling for marketing hype or a smooth sales call. Research the terms of the insurance policy you are considering, and make sure you know under what circumstance you'll be covered – and for how much. But remember, unless you are expecting to use the insurance within the foreseeable future (and who can honestly predict that?), you may be better off taking the money and paying down your credit debt rather than purchasing insurance you may never use.
To sue or not to sue?
Suppose you bought credit card insurance, lost your job and filed a claim, only to discover that your line of business was not covered by your insurance policy. It can happen, and consumer complaints over debt-protection insurance have been mounting. While it would be cost-prohibitive to try to sue a bank or insurance company on your own, joining a class-action lawsuit made up of fellow consumers hurt by debt-protection products may be a better option.
Remember: Most debt-protection insurance is regulated by state laws, so the easiest way to join a class-action suit is to call your state's attorney general's office.
Skip the insurance; pay down your debt
Debt-protection plans can be expensive, confusing and offer little in the way of financial coverage. They will cost you money upfront, and when it comes time to collect, they will not pay for much. You will probably discover that most debt-protection plans are full of loopholes designed to benefit the credit card company and avoid paying you anything at all.
The final word on credit card insurance is that it is a moneymaker that benefits credit card companies – not you. You're better off finding alternate insurance protection for you and your family. In the meantime, take that debt-protection money you were going to spend and pay down your credit card debt instead. That simple act will probably save you more money in the long run.
If you want more credit, check out MoneyTips' list of credit card offers.