What is credit card insurance?
Much like mortgage protection insurance, credit card insurance is an insurance policy designed to pay a certain amount off your monthly credit card statement if you lose your job, are unable to work due to disability, or die. It is usually offered to you by insurance providers through the card lender when you apply for a new credit card.
There are three main types of coverage available through credit card insurance:
- Credit card life insurance: Pays off the full balance you owe on your credit card (up to a certain amount) when you die or become permanently disabled.
- Credit card disability insurance: Pays the minimum due payment (usually 2% to 3% of your balance) for a certain time if you become temporarily disabled. This cover usually only applies to purchases you make before you become disabled, so it is not a free pass to continue racking up debt on your card.
- Credit card involuntary unemployment insurance will cover the minimum payment (usually 2% to 3% of your balance) if a cardholder is laid off for a specific period of time. Charges incurred after the layoff are excluded, and if you’re fired due to serious misconduct , you’re not covered.
Sounds too good to be true? That’s because it sometimes is.
Do you need credit card insurance?
Ultimately it’s up to you, but some things to consider when weighing up your options include:
1. Credit card insurance is not free
Credit card insurance can be a highly expensive form of insurance, depending on how much you owe on your credit card. The premium for credit card insurance is charged as a small percentage of the closing balance on your monthly statement.
2. It may only cover the minimum payment due
Credit card insurance generally only covers the minimum payment unless you die or become permanently disabled. This is only 2% to 3% of your balance, depending on the credit card provider. Some credit card insurance policies cover more though.
The benefit will always make the minimum payments which should cover interest and fees, so no-one should really be worse off by claiming.
3. Exclusions apply, so you may not actually be covered
Exclusions apply, meaning that you won’t always be covered if you lose your job, if you become disabled, or even if you die. Only certain types of unemployment, disability, and death will be covered.
For example, you are not covered for disability if your disability is caused by or related to a sickness or injury that required medical treatment within the past 12 months before you began your card insurance policy.
As another example, seasonal workers or contractors will not be covered for involuntary unemployment when their contract ends, even if they cannot find another job right away. You are also usually not covered if you lose your job within 60 days of beginning the card insurance policy.
Also, age restriction exclusions may apply so that you have to be under a certain age to qualify for cover.
4. Benefit limits apply, so you may not be fully covered
Benefit limits apply, so even if you die or become permanently disabled, the cover that should “pay off your full credit card balance” may only cover you to pay off $25,000 of your credit card balance.
5. Waiting periods and an excess may apply
A waiting period or excess will also usually apply, which would mean that if you are temporarily disabled or you find another job right away, you would not be covered.
The one benefit of credit card insurance, in fact, is that it will pay off your balance when you die, so that your spouse or children (or your estate) does not have to repay your card for you. This means that there is one group of Kiwis who would benefit from having credit card insurance – those who have pre-existing medical conditions that mean they are not eligible for life insurance. Life insurance would pay off your credit card when you die or become disabled, but if you have pre-existing conditions that are excluded, then you will not be eligible for cover. In contrast, credit card insurance is ridiculously easy to sign up for and they do not exclude as many pre-existing conditions.
Need help saving money?
Do you worry about how you would repay your credit card debt and pay for your usual expenses if something happened?
Everyone should have an emergency savings fund to cover a few months’ worth of credit card repayments, rent or mortgage repayments, and groceries, until you find another job or receive a payout to get back on your feet.
If you currently spend most of what you earn and don’t have much saved, you can learn how to budget and save for the future. By controlling your spending, you can ensure that it is at a level that you could repay using emergency savings if you needed to: