Is credit card insurance really necessary?
If you have received an offer for credit card protection insurance, you may be curious as to how it might benefit you. This type of insurance is usually designed to make payments on credit cards, and sometimes other debts, in the event you become ill or are laid off at work. But before you sign up for coverage, make sure you understand exactly what the offer provides.
Match the need to the coverage
There are different types of protection insurance, so determining what coverage you need is an important first step. Beyond policies that provide coverage if you become disabled or unemployed due to layoff, there are policies that can address credit card debt in the event of your death or if you make a purchase that is defective and needs to be fixed or replaced. Before signing up for a plan, though, it is important to understand exactly what is covered and what is excluded. In most cases, you won't be covered if you quit a job or are fired under certain circumstances.
Do I need it?
it's important to evaluate your personal situation to decide if this type of policy makes sense for you. Here are some questions to ask when considering insurance for credit cards.
- Are you at risk of losing your job? Millions of Americans are out of work right now, and many people fear they will be next in the unemployment line. If you currently have a lot of credit card debt and truly believe you could be downsized soon, it might not be a bad idea to purchase credit card insurance. You can always cancel the policy when you feel more secure about your job.
- Do you work in a risky profession? Some jobs are more likely to result in injuries, disabilities, or even death. If you work at such a job, a credit card protection plan may interest you. But generally you're better off purchasing a solid life and/or disability insurance policy that will pay out enough to cover all of your financial obligations.
- Do you work full-time? In many cases, credit card insurance will only cover people who work at least 20 hours a week if they become ill. So if you work fewer hours than that, paying for a protection plan isn't worth it.
- Who needs to be covered? Make sure any plan you purchase also covers your spouse or co-signer on the card.
- Is it easy to cancel the policy? Always read through all the terms before signing up and know your rights for cancelling insurance.
Fees can add up
Generally, the fee for credit card protection insurance is based on a percentage of your debt. For instance, you may be charged 50 cents for every $100. So if you have a credit card balance of $3,000, you would pay $15 a month. Over the course of one year, you could pay a total of $180 for insurance you might never use. The amount is usually rolled into the balance, which means you would also pay interest on it if you carry that balance month to month.
Filing a claim
If you file a claim, keep in mind that many policies only make the minimum monthly payment -- and there is usually a cap on how many months those payments can be made. So paying off credit card debt entirely making only minimum payments may not happen.
Certain workers are ineligible for credit card protection insurance. Ordinarily, you must be employed full time -- not self-employed. If you are laid off, the insurer typically expects proof that you lost your job and an explanation of the circumstances. Sometimes payments won't begin until you've been unemployed for a certain number of days, and the first payment may only be made after the credit card account has gone into default status.
Benefits to coverage
For many people, the benefits of a credit card protection insurance policy do not outweigh the cost. But for those that find it difficult to obtain life insurance due to an existing medical condition, credit protection could help pay down credit card debt or other loans. If you truly believe that a layoff is imminent in your situation, a policy could help you continue to make monthly payments while you hunt for another job.
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 10/25/12 (Modified 08/13/14)