Credit Card Balance Protection Insurance (and Why it Sucks)

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Credit Card Balance Protection Insurance (and Why it Sucks)

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Credit card balance protection insurance (often peddled by telemarketers) is not the deal you may think in the throes of a sales pitch. You may even be paying for it without having requested it. Here's the scoop on credit card balance protection insurance, why it sucks, and some alternatives.

What is Credit Card Balance Protection Insurance?

Credit card balance protection insurance comes in a few different varieties; depending on the kind you have, it could pay out in the event of an involuntary job loss, disability, critical illness, or death.

It usually covers your minimum credit card payments for a specified time period, and in some cases pays off your entire credit card balance.

How Much Does it Cost?

Credit card balance protection insurance costs between $0.75 and $1.50/month (usually around $1.20/month) for every hundred dollars you owe on your credit card - plus applicable sales taxes. While this may not seem like a lot of money, on a $1,000 credit card balance you'll pay up to $15/month - enough to get you over a hundred thousand dollars of life insurance (depending on your age and health).

Even if you pay off your credit card in full each month, many credit card balance protection policies calculate premiums based on your average balance; thus if you had $1,000 in charges and paid them off after 15 days, you'd still pay $7.50...for essentially a $0 benefit.

You may already have this coverage without having requested it; some credit card applications sneak it in (maybe you forgot to un-tick a box), offering a 30-day trial that you forgot to cancel.

Remember also: these premiums don't usually cover you for all four eventualities (job loss, disability, critical illness, death); they're often separate forms of insurance.

Why Credit Card Balance Protection Insurance Sucks

Reading between the lines above, you may already have doubts about credit card balance protection insurance. Here are more reasons to be wary:

  • For insurance covering just minimum payments, at the end of the term you may end up owing even more money due to compound interest.
  • If you lost your job or became ill, what would be of bigger concern to you (and thus, be worth paying premiums to protect yourself for): making the minimum payments on your credit cards, or paying your rent or mortgage? If your answer is the latter, consider the alternatives below instead.
  • There is a lot of fine print and specific circumstances under which the insurance company will - or rather, won't - pay out. Critical illness coverage for example, usually covers heart attack, stroke, and cancer. But the fine print specifies only certain types of strokes and severities of cancer. Job loss coverage can have limitations based on income or how many hours per week you work, and only certain kinds of disabilities (and even deaths) may be acknowledged.
  • In some cases, you don't even get a chance to read the fine print until you've enrolled for the insurance (under the basis that you have 30 days to review the policy and cancel it if you wish).
  • It's not cost-effective. For the amount of payment you get in the event of a claim, you could cover your needs by setting aside the money you would pay in premiums. Or better yet, use those premiums to pay for insurance you need, based on a proper analysis.

Alternatives

Instead of impulsively getting credit card balance protection insurance, consider what unforeseen circumstances could rock your finances, and get specific personal insurance for that. Perform a life insurance needs analysis, consider your disability insurance needs, and get a critical illness insurance policy that refunds your premiums if you don't end up making a claim.

Lastly, review your group health insurance to see if you already have sufficient coverage.

Credit card balance protection insurance might however make sense if you don't otherwise qualify for insurance (due to poor health or medical history), since applications rarely involve a medical questionnaire.

The next time you perform a semi-annual financial review, examine your insurance needs, and if you can, save money on credit card balance protection insurance.

RELATED LINKS

Why Critical Illness Insurance Should be Part of Your Investment Portfolio

Why Your Disability Insurance Plan Might Suck

Everything You Need to Know About Life Insurance

Nora Dunn, travel and lifestyle expert guest blogger for leading provider of debt relief, CareOne Services, Inc. Nora Dunn

Nora Dunn is The Professional Hobo: a full-time traveler and freelance writer. Having sold her business and belongings to travel, she has been on the road since 2007. She travels in a financially sustainable manner, specializing in creative travel strategies like getting free accommodation and flying in business class for less than economy prices; all the while earning income with her location independent career.

As a former Certified Financial Planner, she is financially responsible for her actions along the way. She believes there is a fine balance between planning for tomorrow, and living for today.

She has penned the book How to Get Free Accommodation Around the World, is contributing author to the book 10,001 Ways to Live Large on a Small Budget, and a regular columnist for Wise BreadTransitions Abroad, Credit Walk and many other publications.

Please enjoy her articles on the topics of travel, personal finance, and lifestyle design.

You can also connect with Nora on Facebook, Twitter,and to connect with Nora Dunn on Google + Nora Dunn

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  • The article is very good, according to what I learn may be more, thank you for the sharing

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