7 questions to ask before buying credit card payment protection
Credit card payment protection plans are under fire, but they can
occasionally be worthwhile. To see whether they're right for you, or if there's
a better alternative, answer the following questions:
1. What's your risk of
defaulting, and how costly would it be?
An insurance rule of thumb says you should insure
against losses that are infrequent and severe, according to Evan Levine, a
registered investment adviser and fiduciary with CompleteAdvisors.com. "You
insure anything that you could not write a check for," he says. That's why
financial planners usually recommend buying life insurance if you're the
breadwinner and family members are dependent on your income. Likewise, if you
see a layoff coming and you have a large balance, you may want to consider debt
the benefits of payment protection worth the costs?
In the vast majority of cases, the answer is no. Exclusions
may include restrictions on how many claims you can file in a certain period,
or the cause of your unemployment. "The number of times they reject people based on
the fine print is extremely high," says Ed Mierzwinski, consumer program
director at the federation of state Public Interest Research Groups. Consider the
exclusions and economics of the programs. Most plans have long lists of
instances that are excluded from coverage.
Even if your claim
qualifies, the benefits are usually limited to your minimum monthly
payment and interest. Many times that payment is scarcely more than the premium
for the product, though premiums are generally not charged for the covered
you have, or could you get, alternative insurance?
Many people have term life and disability through
their employer or spouse. That insurance is often enough to pay credit card
bills in a hardship. If you don't have insurance, check out independent
carriers. They usually offer a better deal than payment protection plans,
assuming you qualify, says Levine. "For instance, with life insurance, you
could go to an independent broker or website and probably purchase three to
five times the amount of insurance directly from an insurance company that
specializes, at the same rate.
There's even private unemployment insurance these days. A company
called the Assura Group now offers a policy that will cover the difference
between 50 percent of your previous wages and the amount you're getting from
state unemployment benefits. Payouts last for up
to 24 weeks and premiums cost up to 2 percent of your wages, depending on the
state you live in, the unemployment rate, your salary and your industry. If
you're making more than $50,000 and you can afford to wait the six months it
takes to become eligible for benefits after you enroll, the policy might be
Credit card protection is usually only worthwhile
if you've exhausted all alternatives. "The long and short of it is, it's a last
resort if you can't get any of the stuff anywhere else," says Levine. "Particularly
with life and disability insurance, if you're uninsurable, if you have recent
cancer history, then it might be worth pursuing."
4. Are you disciplined with
Payment protection plans do cover life events such as marriage,
for which no viable insurance
equivalent exists. But experts say there are still smarter things to do with your
money than spend it on payment protection premiums - provided you're
disciplined enough to follow through. "The first thing I recommend to consumers
in all circumstances is get rid of your monthly balances to the extent that you
can," says Mierzwinski. "I realize it's tough in this economy. But you're
better off paying down your monthly balances than paying for these products."
You might also consider putting would-be premium money into a
savings account and self-insuring. "If you're
really worried about what happens if you lose your job, create an emergency
savings account so that you can deal with any problem that comes up," says
Kitces. "We find that is much, much more cost-effective than paying for some
kind of credit card payment adjustments that you get if you happen to lose your
job, assuming you even meet the definition of whatever is required to activate
5. Are you able to get
details of the plan before buying?
The majority of card issuers won't show you the fine print of
their plans until you sign up for a 30-day trial. You then have to stay on top
of the ticking clock to make sure you're not charged if you decide to opt out.
"I think you have to raise a question about any product where you're
required to purchase it before you learn all about the product," says Birny
Birnbaum, executive director of the Center for Economic Justice.
If you don't feel comfortable, don't let pushy sales people sway
6. Is your
spending concentrated on one credit card?
If you still think payment protection might be for you, make
sure you even have a balance on the card you're considering covering. Every
card issuer has a different program, and each program covers only that issuer's
cards. "If I have two credit cards and I did all my spending on credit card B
instead of card A, but card A is the one that has the benefits, then I get
nothing," says Michael Kitces, a certified financial planner with Pinnacle
Advisory Group in Maryland.
7. Are you willing to
Some advisers say marketers drum up too much fear about credit
card debt. If worse comes to worst, credit card debt could be dismissed through
bankruptcy, for those who qualify. "[Payment protection] plans are not worth purchasing for the
very reason that they cover unsecured debt," says Christine Wilton, a
bankruptcy lawyer in Lakewood, California. "If you can't pay it because you're
medically disabled or
you're ill, not only do we discharge in bankruptcy the medical bills but we
also discharge the unsecured credit card debt."
See related: Are credit protection plans worth the cost?
Published: May 15, 2012