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Does Your Credit Card Application Offer Credit Insurance?
Mention insurance and most people think of health insurance, life insurance, and car insurance -- all valuable, useful products. But these days a lot of people in the USA and the U.K. are making use of credit protection insurance, also known as payment protection. It's reasonably priced and can provide a tremendous service if it's ever needed.
Credit protection insurance means that if you are unable to pay your credit card bills due to unemployment or disability, the payment protection service will make the minimum payments for you on your credit cards and other loans. And if you die, your debts are paid off completely, thus freeing your heirs from having to deal with them.
The idea is that if injury or unemployment prevents you from paying your credit card bills, you would normally be stuck. You'd rack up late fees and other penalties, and your credit report would reflect it. Your credit score would probably be lowered. With credit protection, your good credit is safe, and your good credit cards with low rates and no annual fees remain intact.
There are two main types of credit protection insurance: credit life and credit disability. Credit disability takes care of your minimum payments during injury, illness, or unemployment, to keep you from going under at a time when you're most vulnerable. It can cover everything from car insurance payments to payments on personal loans and credit cards. Credit life insurance, meanwhile, takes care of your outstanding debts should you die unexpectedly.
Typically, credit protection coverage is provided by banks and other financial institutions, in conjunction with traditional insurance companies. Your monthly "premium" for the insurance is folded into the loan amount and is simply added to your monthly credit card or loan statement.
Credit protection coverage is optional, of course, and the price is usually a couple dollars per $100 on the loan. So is it right for you? There are a few things to consider, both positive and negative.
On the plus side, there's no physical exam necessary to get coverage, so you won't be disqualified for a "pre-existing condition." You can buy only as much coverage as you need, because it's usually sold per $100 of the loan. No need to buy coverage for up to $20,000 if you only have $10,000 in outstanding debts. Finally, this kind of insurance coverage always costs the same, regardless of your gender, occupation, or age.
There are downsides, though. It's fairly expensive in comparison to other types of insurance, and there are some restrictions on what it will cover. Some kinds of workers (in particularly dangerous jobs — more likely to be injured or disabled) are disqualified. And while it covers you if you become unemployed, the end of seasonal work or taking time off for pregnancy and childbirth don't count as "unemployment." No dice on recovering from elective surgery, either. Be sure to read all the fine print before considering any insurance coverage.
Those are the pros and cons. So is credit protection something you want to get? Look at your situation in terms of your finances, your income, your job security, and your health. Does your employer have a disability plan? If it does, will it cover expenses like credit card bills, or only the basics? Do you have some other plan in place, should you become unemployed or unable to work? Do you have a family to support? In some cases, credit protection insurance might be a very wise move.
Consider these questions:
- If you can't pay your credit card bills, who will? Usually, the reason people get credit insurance is so they won't be a burden on their families if they're out of work or disabled, though even people with no family or dependents still often find it a useful thing to have.
- Is the amount of your debts minor enough that even without credit insurance, you'd still be able to make the payments?
- Do you have any savings? If your savings are significant enough, you might not need credit protection to pay your bills if you lose your job.
Basically, while credit protection insurance isn't for everyone, it is valuable to millions of people. Anyone with outstanding debts of any kind — houses, cars, credit cards, etc. — should at least consider the possibility. It's well worth looking into for the sake of your peace of mind.
If, after looking at all the options and weighing things carefully, you decide you don't want credit protection insurance, you should still take this opportunity to look closely at your financial future. What would happen if you couldn't pay your bills? Do you have savings? Do you have a plan in mind? It's best to prepare for as many contingencies as possible, to keep you and your family financially safe.
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