A guest post from Noreen Ruth
Consumers are being solicited by credit card companies not only to apply for an account but for add-ons like credit monitoring and credit insurance. At first glance, the idea sounds great; for mere pennies credit card debt will be paid, in the case of an emergency. The lure for consumers is that these services are an important security necessity. It is implied that hackers and credit card thieves are around every corner. But is credit card insurance worth the price? Here we’ll show you the pros and cons to help you decide.
Four Types of Credit Insurance
Credit insurance is designed to pay the minimum monthly payment when the policy holder is unable to pay. There are four specific types: disability, involuntary employment, property insurance to fix or repair purchased items and life insurance that covers payment in full in the event of death. The policies are offered by not only credit card companies but banks, retailers and auto dealers. On average, the premium is $0.75 or 1% for each outstanding balance of $100 per month; that’s at least $22 on a balance of $3,000. Also remember that you’ll need separate policies for each credit card you want covered.
Big Profits for IssuersAccording to Consumer Reports, annual sales of credit insurance are estimated to be a whopping $6 billion and a big money maker for issuers. When compared to other types of insurance, like auto and homeowners, credit card insurance policies are paid out at a much lower rate. An estimated 80 percent of premiums are paid out in claims for companies that sell life, property and casualty insurance policies compared to 44 percent for companies selling credit insurance. Increased profits for issuers are a result of fewer claims filed against these policies and restrictions may prevent a payout, earning large profits for the credit card company.
The Debate
Insurance policies are designed to offer protection against life’s’ unexpected traumas. Consumers who carry large amounts of debt or use credit just to get by and cannot get insurance elsewhere may benefit from a credit insurance policy. It’s easy to get, doesn’t require any health exam or won’t be denied because of a pre-existing condition. People who work in industries where there is the possibility of layoffs might want to consider involuntary unemployment options.Critics of credit insurance, on the other hand, argue that it’s a ruse. Companies that offer the policies bank on the profits with little benefit being passed on to policy holders. In other words, it’s stacked against consumers, who would be better served by purchasing a life insurance policy. There’s also a good chance that another insurance policy is already covering the consumer. For example, many employers provide disability coverage that would apply in the situations that additional credit insurance would cover.
A Personal Decision
The question remains whether credit insurance is worth the cost. The simple answer is that there’s no fast yes or no. It’s a matter of opinion and depends on your specific situation. With most plans only covering the minimum payments, the premium may be better spent paying down the debt or set aside in an emergency fund.
If you decide credit insurance is right for you, be sure to read and understand all the fine print, terms and conditions and restrictions. Use a calculator to do the math to clearly see what it will cost in the long run. Learning about all the options will help you make the decision. As with everything in life, however, if it sounds too good to be true, it probably is.
About The Author: Noreen Ruth writes for ASAP credit card blog and several popular finance websites. She is interested in educating consumers about using credit responsibly and about legislative action that will affect their ability to borrow the money they need. She has contributed hundreds of articles to various online sites that provide content to educate consumers on reward credit cards, debt relief services, loans and other finance related topics.