Is credit card insurance a good idea?
Given the uncertain economy, you might be tempted by offers from your credit card companies for credit card protection insurance.
This product promises to pay your bill if you lose your job, die, become disabled, or suffer an injury and can't work. If you're already struggling with credit card debt and your job security feels shaky, it might sound like a good idea.
But credit insurance, which is also available for car loans, mortgages, and other types of credit, has its fair share of critics, and many financial experts say other options, such as life insurance, are more cost-effective.
Cost of credit card protection
The price might not sound like much at first, but it adds up fast. One credit card company, for instance, charges 87 cents per $100 of the monthly balance. Cheap, right? Not if you carry a substantial balance like many cardholders do. Say your balance averages $4,000 a month. The insurance would cost $34.80 a month -- $417.60 a year. Consider instead applying that extra $34.80 toward paying down your credit card debt.
What benefits do you get from the insurance? In most cases credit card insurance pays only the minimum monthly payment while you're out of work or temporarily disabled. You still rack up interest charges, and unless you're disabled or unable to find work for a very long time, the benefit won't add up to much. Also, check out the limits on benefits. Is there a cap for how much the insurance pays if it promises to pay off an entire balance in case of death?
Read the fine print. Is there a waiting period for benefits? How hard will it be to collect benefits? Remember, too, that credit insurance from one credit card company doesn't cover balances on your other credit cards.
Alternatives to credit card insurance
Credit card insurance to protect your family from your bills in case you die is unnecessary if you have a good life insurance policy. If you don't have life or disability insurance, then shop around and compare policies and prices. These provide much broader coverage than credit insurance.
Credit card insurance might be a good idea for people who have little savings, high credit card balances, and no other insurance; however, most experts advise consumers to find other ways to protect themselves.
Published 09/03/12 (Modified 11/12/13)