Credit Card Insurance? No Thanks.

By Nora Dunn. Last updated 22 June 2009. 9 comments
Photo: Nora Dunn

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.

Similar to individual Critical Illness, Disability, or Life Insurance policies, there are a few things that bear consideration in order to make a sound decision:

  • 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.

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Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

Guest's picture

I know that when I signed up for the insurance for my credit card it was just a waste of money. When I told them that I had lost my job they wouldn't cover it anyways. I was really mad that they couldn't do anything for me.I will never sign up for that again.

Guest's picture

A waste of money. I was laid off and I've been able to manage until now with unemployment, savings and I had a roommate. Things changed since then and I had to try and activate the insurance to get some help because I still haven't found a job. They won't cover me because they say I lost my job 6 months ago. My point is instead of taking advantage and using the insurance right away, I tried to be responsible and continue to make payments as long as I could. In the end it cost me to be nice. I will never get insurance again!

Guest's picture

If you would be interested in being a part of a class action against the "credit card companies" (banks), call me at 800-852-6299 ext 7155.

Guest's picture
Debbie M

One time someone called me to sell me this and I said I didn't need it. He then explained how great it was and why. I then explained that I insure myself with a handy thing called a savings account. And it doesn't just work on credit card payments, it can be used towards anything. The poor youngster said that he liked this idea and was going to start using it himself. I think he actually used the phrase "steal it." He's going to steal my idea of having a savings account.

That was the most fun but also sad sales call I've ever had. I feel bad that he might have liked his job less afterwards.

Nora Dunn's picture

Don't feel bad! "Stealing" such a great idea as having a savings account was probably a turning point in his financial life! Maybe you'll even see him writing articles like this one before long!

Guest's picture

while it a given that a savings account is preferable a lot of people do not have a back up plan of any kind.
Unemployment insurance is not new in the US but supplemental job loss coverage is.. It is very popular in Europe and Canada. In the old days people scoffed at health insurance to pay hospital bills..(some still do!) The point is as this type of coverage is being made available, it will be found that personal supplemental job loss coverage, paid in addition to regular unemployment, will become a very good way to cope with expenses when they get disabled or go to the hospital or lose their job..This type of coverage is a spin off from credit card coverage and can even pay for your mortgage if you have it before a claim occurs.. If you wonder how you will pay your mortgage if you are laid off, get sick and cant work, go to the hospital, or even die you should have this new coverage..

my opinion should be yours....

Guest's picture

I worked for a major credit card company for a couple of years. Many, many cardholders that took out the insurance were stunned when the underwriter (not the bank) wouldn't pay when they lost their jobs. The bank's response was that the insurance policy stipulates that the credit card accounts must be current (no late or past due payments) while the insurance claim is filed and processed, or the claim for benefits will be denied. The policy was to inform cardholders to contact the insurance underwriter for the details. The bank pushed the insurance product because it inflates credit card balances, at minimal to no cost to the bank, thus providing a larger claim and higher base for interest charges.

Guest's picture

it is a scam, I have had cards for year having run side businesses apart from my regular job. I quit doing side work due to none payments and in December my main job laid off. I call my card companies because I carried the "Insurance" on them all. I was refused by all of them. I paid for years to be covered for involuntary unemployment and they had some excuse as to why I couldn't be covered.
I did not mean to come and gripe. If you have it or are thinking of getting it I would recommend against it. Simply plan you a budget that will allow you to servive on Unemployment and saving for 6 months at least, if you can not do this with a card payment then don't get the card.

Guest's picture

Even if you think credit card insurance sounds like a good idea, avoid it if you're self-employed. I have yet to see a plan that covers people in that situation; sometimes they don't even cover AD&D if you work for yourself!