Credit Insurance...Useful but Limited - Know the Real Value Before You Sign

. . .Useful but Limited -- Know the Real Value Before you Sign

Credit insurance is commonly misunderstood and users often accept it because it "sounds" like it should be of value.

So, find out exactly what it costs, what it covers. and when and how it pays before you sign up. In its essence it is of value to a relatively small percentage of cardholders -- make sure it doesn't simply double coverage you have somewhere else (in insurance policies or through your workplace) or that it won't end up costing you more than it's worth (do some quick calculator work).

You can insure yourself against being unable to pay if you are disabled or lose your job. And you can cover yourself so that if you die your card debt (or most of it) can be paid off.

Credit insurance is usually offered as a mix of life, disability, and unemployment coverage. It is intended to cover your minimum monthly payment if you can't pay because of a job loss or disability and to pay off all, or most, of your balance if you die.

A plus that comes with that -- your credit rating stays healthy even if you don't.

What you pay is usually fixed by what your last bill was because the premium covers only what you owed at that time (not new card bills you have run up).

Remember that credit insurance is voluntary, and that rates are regulated by your state insurance commissioner (so you can check to make sure you aren't getting ripped off).

Some policies have caps that limit the total liability. Know what that amount is so that you don't run over it in any month.

It's easy to add to your credit card (just ask the card issuer) and usually easy to get rid of (since you pay a monthly premium, it can be instantly cancelled).

Neither unemployment nor life card insurance is really popular, and only a minority of card owners use them. They are most popular with people who do not have other insurance that might cover debts incurred by loss of job, disability or death.

...It Pays to Ask Questions Before Paying for Credit Card Insurance

Do you really need credit card insurance? If so, are the card insurance programs being offered to you a good deal? The answers depend on which of the many forms of credit card insurance you're considering... and who's offering it.

There is, for example, insurance to pay your credit card bills if you become disabled or you lose your job. This type of insurance may be a good thing if your other potential sources of income wouldn't be enough to pay your monthly debts. But, there may be a waiting period before you'd receive your first benefit payment, and the insurance may only pay the minimum card payment each month (up to the policy coverage limit). So, unless you are disabled or out of work for a very long time, the cost of the premiums could easily exceed any monthly benefits.

Likewise, insurance that will pay off card balances if you die may make sense only if you have a lot of credit card debt and little or no other life insurance. In general, you might be better off insuring yourself against income loss or death by purchasing regular disability or life insurance instead of credit insurance.

Some credit card protection plans are basically notification services—they'll contact your card issuers if your cards are lost or stolen and arrange for new cards, or maybe they'll periodically send you copies of your credit report so you can review it for accuracy. "This may be a useful service for some people, but it offers nothing you cannot do yourself with a minimum amount of effort. If you think you want this kind of service, though, you should first ask your card issuers if they offer the same service more cheaply or at no cost.

Some telemarketers are aggressively selling insurance that covers the fraudulent use of your credit card. Do you really need that kind of credit card insurance? Most experts say no. Federal law already limits your liability to the first $50 of fraud losses per account, provided you make a reasonable effort to notify the card issuer of any lost or stolen cards within a reasonable period of time. And in many cases, the issuer will waive the $50 requirement. If your card issuer still insists on the $50 payment, check with the company that insures your home, because your existing policy may cover that loss.

Never to give your credit card number to anyone selling credit card loss protection insurance over the telephone, because you may be dealing with a con artist who could make unauthorized charges to your card.

If you are considering credit card insurance, FDIC suggests asking:

  • Why do you want this type of protection?
  • What benefits will you gain from it, and how much are you willing to pay?
  • Does the extra insurance make sense for your spending and borrowing habits? ("For example," Kincaid says, "if you only charge a minimum amount, what would be the purpose of buying insurance to pay off your credit card bill?")
  • Also, are you sure you're dealing with a legitimate company? If you have doubts about an insurance plan or the company offering it, contact your state government's insurance commissioner or office of consumer affairs.