Look into the costs and benefits of the insurance, based on your specific situation, and see if you would be better off saving the money and building up an emergency fund.
Getting insurance is one strategy to handle the many surprises that life is sure to throw your way, with the coronavirus pandemic being a classic example. Among the various better-known insurance products such as life insurance, health insurance and home insurance is a more obscure sort of insurance that credit cardholders might avail of, called credit card debt protection insurance.
Let’s delve into how credit card insurance works and weigh its risks and benefits.
What is credit card debt protection insurance?
Credit card debt protection insurance helps protect your credit standing by providing protection in case you are not able to make your monthly card payment. Generally, it helps cover your minimum card payment for a specified period of time.
For instance, Discover says that its payment protection would allow you to not make minimum payments on your credit card for up to 24 months for long-term qualifying events, such as disability, and up to three months in case of short-term events, such as childbirth. You also wouldn’t have to pay interest or late fees during the time the payment is suspended.
Your card issuer could also outright cancel your card payments for some time and reduce your balance so you won’t have to make up the payments later. In some cases, the death of the cardholder, for one, the debt itself could also be canceled.
When does credit card debt protection insurance kick in?
There are certain specified events that trigger the credit card payment protection insurance, depending on the terms of your insurance. These include:
- Death: In case you die, your heirs may not need to pay off the balance on your card.
- Disability: Any disability that prevents you from working could activate the insurance.
- Unemployment: Unemployment that is not of your choice (in case you lose your job, for instance, rather than voluntarily quit it) is another trigger. This could also include protection for an involuntary job loss for a cardholder’s significant other.
- Leave of absence: If you take a defined leave of absence from your job, maybe to provide care for a relative, that could apply too.
- Other events: Events such as a natural disaster, marriage, divorce, call to active military duty, adoption of a child, retirement, and relocation could activate the protection too. Protection could also be set off by events impacting others authorized to use the card or the highest-earning household member.
- Emergency: A 2011 Government Accountability Office report on the credit card debt protection market, which studied nine major card issuers, says that at least one issuer offers an “emergency payment benefit” enabling the insured to cancel their minimum monthly payment once a year for any reason. And another issuer allows its customers to suspend their payments once a year during months that include certain federal holidays.
The GAO study found that the number of events covered by each issuer’s insurance ranged from a mere four to as many as 21.
You might think these benefits sound good, but in reality, they may not be readily available. The insurance is typically only available after you meet a variety of terms and conditions. Generally, you should not already be behind on your payments before availing of this insurance. Other exclusions could include:
- No disability benefits in case you have a preexisting health condition
- Denying unemployment benefits to seasonal workers, part-time workers or self-employed workers
- A waiting period before you can avail of your benefits
- A limit on the number of triggering events per year
- Setting a maximum on the total amount of the benefit, in the case of debt cancellation
Do you need credit card debt protection insurance?
Looking into the costs of credit card debt protection insurance, it is based on your card’s monthly balance and typically costs about 10%, or more, a year.
As for benefits, the GAO study found that in 2009 the nine major issuers paid out 21 cents in benefits for every dollar they received in payments. Also, only 5.3% of balance-carrying cardholders with the insurance received the protection, with the average benefit they received being $607.
That paltry benefit could well exceed the amount you pay in costs over the years, as one consumer, who alleges they were signed up for this program without their knowledge, found out. A 2019 complaint from this Oklahoma consumer to the Consumer Financial Bureau states their Citibank Best Buy card had been charging them for this protection since 2005 when they opened their account.
According to this consumer’s narrative, noting that they have been charged more than $5,000 in total for this protection from 2005 through 2019 (which they wanted refunded), “This whole thing is problematic for a few reasons: 1) I never purchase or agree to these types of plans. They are a waste of time and that is why I have insurance/disability. It would be very out of character for me to agree to something so trivial. 2) I have no recollection of agreeing to this plan, and I have a pretty good memory.”
And the GAO reports that in 2009 about 24% of benefits requests were denied by the nine issuers it studied. More than half of the denials were due to the cardholder’s inability to provide adequate documentation about the responsible event.
Considering that you may well end up paying for insurance you are not likely to avail of, and could well be refused if you do need it, it seems the average consumer is not likely to benefit from credit card debt protection insurance.
Considering the high level of benefits rejections on credit card debt protection insurance you may be better off without it. Instead of paying for this insurance, you could save the money and build up an emergency fund that you could tap into if you do need the money to make your card payments.
Moreover, during times of emergencies that have an overall economic impact, such as the COVID-19 pandemic, issuers are likely to offer their forbearance programs which you don’t need to be insured to avail of anyway.
Contact me at email@example.com with your credit card-related questions.