Credit card insurance: is it a good idea?

Friday, September 14th, 2012
Updated: September 14th, 2012
The content is accurate at the time of publication and is subject to change.

With today’s economy, you might be incited by offers from your credit card companies to credit card protection insurance.

This product promises to pay your bill if you lose your job, become disabled, suffer an injury and can’t work, or die. If you’re already struggling with credit card debt and your job stability feels shaky, it might sound like a good idea.

But credit insurance, which is also available for other types of credit, has its fair share of critics, and many financial experts say other options, for example life insurance, are more cost-effective.

Let’s have a closer look and know why:

The price you should pay

The cost might not sound like much at first, but it adds up fast. Let’s look at the example: say one credit card company charges 82 cents per $100 of the monthly balance. Sounds cheap, right? Not if you carry a considerable balance like many cardholders do. For instance your balance averages $5,000 a month. The insurance would cost $41 a month – $492 a year. Use that extra $41 for paying down your credit card debt instead.

Limited benefits

Now let’s see at benefits you get, or maybe not, from the insurance. Generally credit card insurance pays only the minimum monthly payment while you’re out of work or temporarily disabled. You still accumulate interest charges, and unless you’re disabled or unable to find work for a very long time, the benefit won’t work in full. Also, there may be some limitations on benefits which are worth being checked out. For example the amount of insurance payments may be capped if there are promises to pay off an entire balance in case of death.

Take a magnifying glass and read the fine print – companies love writing important things in fine prints. Read if there is a waiting period for benefits. How hard will it be to collect benefits? And don’t forget that credit insurance from one credit card company doesn’t cover balances on your other credit cards.

Think of alternatives

There is no need in credit card insurance if you have a good life insurance policy. Usually a life insurance policy is enough to protect you and your family from your bills in case you die. If you don’t have life or disability insurance, then search and compare policies and prices. These can provide much broader coverage than credit insurance.

Credit card insurance might be a good idea if you have high credit card balances, little savings and no other insurance. However, most experts are unison in opinion that it is better to find other ways to get protected.

All rates and fees, and other terms and conditions of the products mentioned in this article/post are actual as of the last update date but are subject to change. See the current products' Terms & Conditions on the issuing banks' websites.

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