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Whether you’re aware of it or not, you can purchase insurance that promises to pay your credit card bills under certain circumstances. Small monthly premiums can potentially buy coverage for such things such as paying off your credit card balance if you die – which is called credit life insurance.
There is also credit disability insurance that makes your minimum monthly payment for you if you are disabled. Unemployment credit insurance kicks in to do the same thing if you are involuntarily laid off from your job, and credit property insurance offers to pay off merchandise you bought using your credit card, in the event the item gets destroyed. So if you plan to buy a new guitar and smash it up on stage, then this category of coverage might appeal to you.
But don’t get your hopes up, because all insurance policies have specific rules, restrictions, and exceptions – and that is especially true when you sign up for credit card insurance. The truth of the matter is that I’ve examined credit card insurance from all different angles and my conclusion is that it makes no sense for any cardholder because it is pretty much a waste of money. My view is essentially shared by every other knowledgeable expert I’ve encountered who has weighed in on the subject, too, except for those who are likely paid to peddle credit card insurance products.
How Does Credit Insurance Work?
I could write a book on the topic, and maybe I should. Meanwhile here’s the Cliff Notes version to save you the hassle of doing your own research. The way the insurance works is that you fork over a monthly fee, that is often based on the size of your outstanding credit card balance. The more you owe, the more you pay for insurance. Typical coverage can add up to a few hundred dollars a year. The small print on the policies has oodles of loopholes, all of which favor the insurance company. Chances are high that if you pulverize your own guitar because it excites the crowd, the insurance company will not be impressed and will not pay you a dime.
One woman I read about lost her job, for instance, due to downsizing. She was expecting to have her credit card payments paid for her until she got back on her feet. But first, because she is a hardworking and responsible consumer, she spent six months looking for another job. When that failed she applied for coverage and was denied because she had waited too long to ask for it. Even if she had gotten covered, credit card insurance only lasts a short while and then they stop making the payments and you are right back where you started.
There are age restrictions on some of the credit life policies, too and if you are too old they won’t pay. But some cardholders have been sold policies over the phone anyway. Since they didn’t ask about age requirements the sales rep didn’t mention it. The cardholders didn’t study the small print on the policy, paid month after month, and got nothing in return.
If you are lucky enough to have your claim accepted, the coverage only pays the minimum monthly payment. That does nothing to relieve your debt; it just keeps you from defaulting. So it is really a gimmick to protect the bank from delinquent cardholders – not to help you if you fall on hard times.
But that’s not all. Most states don’t regulate credit card insurance companies and the payout ratios compared to the premiums earned from cardholders are so low that they generally don’t meet normal insurance industry trade association minimums. Card companies and insurers rake in millions of dollars per year selling this coverage. Meanwhile you should know that major credit card issuers with excellent reputations have been taken to court over insurance and wound up having to pay big bucks to settle class-action suits. If you think you’re covered and stop making your credit card minimum payments, on the other hand, you’ll get sued by your card company.
Is Credit Card Insurance a Rip Off?
Here’s the bottom line. If you are convinced that you need this kind of insurance, you probably should not use a credit card in the first place. Credit cards are useful tools but they can wreak havoc on a person’s financial life if they aren’t used wisely. Don’t delude yourself into thinking that card insurance is going to save the day. Instead, use your plastic responsibly and set aside the money you would otherwise pay to buy this insurance and put it into an emergency fund to cover unfortunate contingencies. Then you can solve your own problems should they arise. You also won’t be tricked into the false sense of security which credit card insurance offers. You’ll be enjoying real financial security – the kind you can take to the bank.