Credit Card Insurance: Do you need it?

The next time you sign up for a credit card, pay attention to what comes along with it. Generally either along with the credit card application itself, or following closely behind via mail or phone call, will be an offer for credit insurance.

According to the Federal Trade Commission, credit insurance may take one of four basic forms:

• Credit Life Insurance

• Credit Disability Insurance

• Involuntary Unemployment Insurance

• Credit Property Insurance

The main purpose of credit insurance, sometimes also known as a payment protection plan, is to cover payments to your lender in the event that you are unable to make them. Depending on your specific credit insurance policy, minimum monthly payments may be made to your lender if you suffer a debilitating injury or a job loss, or your balance may be paid off entirely in the event of your death.

Credit insurance is a financial product that credit card lenders (such as banks) are provided with for a low, bulk rate. Your lender then will offer you the opportunity to buy the insurance at a much higher rate. In general, you can expect to pay about $0.75 to $1.00 in credit insurance for every $100 kept as a balance on your card. Usually, this payment is administered each month based on your balance.

Because the opportunity to acquire credit insurance comes directly from the lender of any given credit card offer, borrowers do not have the ability to compare plans before deciding about credit insurance. These policies are take it or leave it -- and the terms and conditions of the insurance are non-negotiable.

Each state sets its own limit for credit insurance rates, so buying it might be a better or worse idea for you depending on where in the U.S. you live. However, many experts do not think that taking out credit insurance is a particularly wise option for most consumers in general.


Pros and Cons

The main cost associated with credit insurance is, literally, the cost. While $0.75 per dollar on your balance might not seem like a high price to pay for protecting yourself against credit card debt, you may be able to get a better insurance deal elsewhere that will offer the same advantages. For example, traditional life insurance policies and disability polices actually end up being cheaper than credit insurance for many people, and they offer so many more benefits above and beyond paying off your credit card lender.

Nevertheless, credit insurance is a good option for some people, especially for those who cannot get alternative insurance for whatever reason. About ¼ of American families do not have any life insurance, so credit insurance can be a sufficient way of insuring at least one financial obligation. In fact, credit insurance is a bit advantageous to other forms of insurance in that submitting claims usually is very easy -- normally this is not the case!

In addition, rates on credit insurance are reliable because they are set without regard to one’s personal attributes like age, health, etc.

The Laws of Lending

It is against the law for any lender to include credit insurance with your credit card agreement unless you are aware and have given permission. It also is against the law for a lender to deny you for credit simply because you do not wish to purchase credit insurance. If you already have credit insurance, it is your right to cancel the policy at any time.

Conclusion

While credit insurance usually is not a very lucrative option for most credit card users, it does have its advantages. If you are interested in credit insurance on a new credit card, then keep an eye out for an offer right after (or while) you apply. If you would like to obtain insurance on a credit card that you already have, then simply ask your lender at any time.