Credit Card Insurance? No Thanks.
So your credit card company just called offering you balance protection insurance against job loss, disability, life, or critical illness. The cost will be just pennies, calculated monthly based on your outstanding balance.
Do you take it?
The question is: have you performed an insurance needs analysis, or will you just make the decision to take the insurance based on impulse and instinct?
There are typically four different types of credit card insurance:
- Involuntary Job Loss: This pays your monthly minimum payment for a specified period of time after you lose your job through downsizing or layoffs.
- Disability: Like above, your monthly minimum payment is covered for a specified time period upon becoming disabled and unable to work.
- Critical Illness: Similar to above.
- Life or AD&D (Accidental Death & Dismemberment): If you die, your entire credit card balance will be paid.
The cost may initially seem small at between $0.75 and $1.50 per $100 of outstanding credit card balance each month, but in the spirit of being frugal, is that money wisely spent?
Consider the fact that with the exception of credit life protection, this insurance doesn't actually pay off your debt. It simply makes the minimum payments on your outstanding balance for the term of the contract. In fact, depending on the credit card and interest charges, you may sometimes find that the balance at the end of the contract is actually higher than when the claim occurred due to compounding interest.
Are those minimum payments something that would cripple you financially in the event of an illness or job loss? The answer will be different for everybody - this is just food for thought.
- What are the terms of the policy? (For example, what are the specific definitions under which the insurance company will pay)?
- What coverage do you need? If you lose that income or become ill, will minimum payments on your credit cards be of benefit to you, or do you have other funds that will suit the purpose?
- What coverage to you already have? There is no point in duplicating your insurance coverage if you already have a CI policy in place.
- In the case of job loss insurance, what are the exact terms? You may be surprised at the restrictions of this initially appealing option.
- Is it cost effective? As a case study, let's examine the life insurance as an example. On a $10,000 credit card balance, at $0.80 per $100 of outstanding balance, your monthly charge would be approximately $80/month. For $80/month, a 35year old non-smoking female in good health can purchase upwards of $500,000 of Term Life Insurance.
- Can you cancel the policy, and under what terms? If you do decide to take it, make sure you keep all your documentation together so cancelling it when the time comes is easy.
- Are you insurable? Many balance protection policies don't require any evidence of insurability to qualify. If you have medical issues that make you a higher risk such that individual policies would either be cost-prohibitive or unavailable to you, then maybe this is just the protection you need.
On the flip side, one type of credit card insurance that you may not realize you might automatically have is travel insurance. Many credit cards feature automatic flight and travel coverage if you pay for a trip using that card. In fact, before you go out and purchase travel insurance, it bears calling your credit card company to find out the specific terms of their coverage. You may find that you can save a few extra bucks by not having to go out and get extra travel coverage!
As with all insurance policies, take a good hard look at what you need, what you can afford, and whether the "easy option" being offered to you over the phone is going to be easy in the long run.