Do You Really Need Insurance Premiums for Your Credit Cards?
Insurance premiums are offered to card holders as a way to pay minimum monthly payments in the event the account holder is not able to pay. This may be due to jobs loss or medical emergency or any other event that causes a loss of income and lost ability to make monthly payments.
Lenders have increased their promotions for credit card insurance recently. Credit card debt is at an all time high and consumers are urged by lenders to viewinsurance premiums as a security factor for their credit accounts.
Consumer Reports, a recognized leader in the consumer protection arena, claims sales of credit insurance have reached $6 billion per year.
Cost of Insurance Premiums
The amount you pay for insurance premiums may seem small at first. Most policies charge about 75 cents for each $100 dollars you owe.
Seventy-five cents doesn't sound like much, does it? What if you owe $5000 on your credit card? The monthly credit card insurance premium would be $37.50 or $450 per year.
If you are considering buying policies to insure your credit card payments, be certain to take a clear look at what the monthly card insurance premium would be. Chances are it's not as inexpensive as it first appears.
Types of Credit Insurance
Credit card lenders aren't the only lenders who offer to insure your credit payments. This is a big insurance division and banks, department stores and car dealerships will often present the "special option" of buying expensive credit insurance to anyone taking out a loan. There are several types of credit insurance.
Credit disability insurance pays your monthly credit card bills if you become disabled. There is usually a limit of how many weeks or months payments will continue and the disability may be divided between short term and long term.
Insurance to protect you from job loss is the latest flavor of the month for credit lenders. Loss of employment is loss of income and in a time of high unemployment rates, lenders are pushing involuntary unemployment insurance diligently to credit card account holders.
Other type of credit insurance will pay to fix or replace items you bought with your credit card or will pay off your debt in full if you die. This is credit life insurance and is a policy you should avoid taking.
What are the Terms?
Enrollment in insurance premiums is voluntary and you can cancel at any time. Of course, if you cancel you lose the coverage and you don't get any of the money back you previously paid.
State laws regulated rates that can be charged as card insurance premiums and these laws most often fall under the office of the state's insurance commissioner.
You do have the benefit of knowing your monthly minimum payments on your credit card will be paid during your disability or period of unemployment.
This will maintain your credit rating and most policies include payment in full (usually with a cap of $10,000) in the event your death.
What is not mentioned except in the fine print is the policy pays only the minimum due on your credit account each month. If you have a high APR on your card, this may not be sufficient to reduce the balance of your debt.
In addition, credit rating bureaus do not look favorably on consumers who pay only the minimum due each month. This conflicts with the advertised advantage of not harming your credit rating.
Good Deal for Consumers?
Simple answer is "no, they aren't". Those who sell the insurance say it is a great safety net and offers protection for users. If you are carrying a high debt on your credit card and know you have health problems, this might be a good purchase to make.
One thing is clear - credit card insurance is a great source of income for lenders. There are others ways to provide safety such as specialized health insurance that pays bills when you are disables and term life insurance which is inexpensive and will pay off your debt for a much cheaper fee over time.
The biggest problem is with the cost of the insurance. Those in lower income brackets are at highest risk of missing a payment due to lost income and yet they are the least able to afford to pay an extra $7.50 per month for each thousand dollars of debt on their card.
These lower income consumers are often paying the highest APR and are often unable to continue the insurance payments long enough to collect on the policy.
Insurance premiums are only a good idea for someone with high credit card debt and in failing health. For consumers in good health, this is a fee that often yields no payout at all.
There are other forms of insurance you can buy that will cover credit card debt in a health crisis for much lower fees. Term life policies will pay off your debt in the even of your death for a fraction of the cost of years of insurance premiums.