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Getting insurance is one strategy for coping with the many surprises that life is bound to throw at you, classic examples of which are the coronavirus pandemic and inflation. Among the various more well-known insurance products such as life insurance, health insurance, and home insurance, there is a more obscure type of insurance that credit card holders can take advantage of called credit card debt insurance.
Let’s dive into how credit card insurance works and weigh its risks and benefits.
What is credit card debt insurance?
Credit card debt insurance helps protect your creditworthiness by providing protection in case you are unable to make your monthly card payment. This usually helps to cover the minimum card payment over a certain period of time.
For example, Discover says that its payment protection will allow you to make minimum payments on your credit card for up to 24 months for long-term qualifying events, such as disability or involuntary unemployment, and up to three months for short-term ones. events such as the birth of a child or a wedding. You also won’t have to pay interest or late fees while your payment is on hold.
Your card issuer may also cancel your card payments entirely for a while and reduce your balance so you don’t have to pay payments later. In some cases – the death of the cardholder, for example – the debt itself could be cancelled.
When does credit card debt insurance take effect?
Depending on the terms of your insurance, there are certain specific events that activate credit card payment protection insurance. This includes:
- DeathA: In the event of your death, your heirs may not need to pay the balance on your card.
- DisabilityA: Any disability that prevents you from working can activate insurance.
- Unemployment: Unemployment that is not your choice (for example, if you lose your job instead of leaving it voluntarily) is another trigger. This may also include protection against inadvertent loss of work for the other half of the cardholder.
- VacationA: If you take certain leave from work, perhaps to care for a relative, this may also apply.
- Other events: Events such as natural disaster, marriage, divorce, active military service, child adoption, retirement, and relocation can also activate protection. The protection can also be activated by events affecting other eligible card holders or the highest income family member.
- Emergency: A 2011 Government Accountability Office report on the credit card debt protection market, which examined nine major card issuers, said at least one issuer offered a “fast payment payment” that allows insured individuals to waive the minimum monthly payment once a year for any reason. And another issuer allowed its customers to suspend payments once a year in months that include certain federal holidays.
The GAO study found that the number of events covered by each issuer’s insurance ranged from four to 21.
You may think these benefits sound good, but they may not actually be available. Insurance is usually only available after you meet a number of conditions. As a rule, you must keep up with your payments before you use this insurance. Other exceptions may include:
- No disability benefits if you already have health problems
- Denial of unemployment benefits to seasonal workers, part-time workers, or self-employed workers
- Waiting period before you can use your benefits
- Limit on the number of trigger events per year
- Establishing a Maximum Total Benefit in the Event of Debt Cancellation
Do you need credit card debt protection insurance?
The average consumer is unlikely to need insurance to protect credit card debt, and there is evidence that its benefits may not outweigh the costs for you, even if you approve it.
The cost of credit card debt insurance depends on your card’s monthly balance and is typically around 10 percent or more per year. In terms of benefits, the GAO study found that in 2009, nine major issuers paid out 21 cents for every dollar received in payments. In addition, only 5.3 percent of cardholders with an insured balance received protection, with an average benefit they received of $607.
This tiny benefit can far outweigh what you pay in costs over the years, as one consumer found out who claimed to have signed up for the program without their knowledge. A 2019 complaint from this Oklahoma consumer to the Consumer Financial Protection Bureau states that their Citibank Best Buy card has charged them for this protection since 2005, when they opened their account. The consumer noted that he was charged over $5,000 from 2005 to 2019 for this protection.
And the GAO reported that in 2009, about 24 percent of exemption requests were denied by the nine issuers studied. More than half of the failures were related to the failure of the cardholder to provide proper documentation of the responsible event.
bottom line
Given the high rate of waivers on credit card debt insurance benefits, you might be better off without it. Instead of paying for this insurance, you could save money and set up a reserve fund that you could use if you need money for card payments.
Also, during emergencies that have a wide economic impact, such as the coronavirus pandemic or a recession, issuers are likely to offer indulgence programs that you don’t need insurance to use.
Contact me at pthangavelu@redventures.com if you have any credit card related questions.
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The editorial content on this page is based solely on the objective judgment of our contributors and is not based on advertising. It was not provided or ordered by credit card issuers. However, we may receive compensation when you click on links to our partners’ products.