Ask Julie

Insuring Your Debt
Dear Julie, I have high credit card balances and I want to protect my family should I die or become ill or unemployed. Should I accept the credit insurance the credit card companies are offering me? How exactly do they work and are they worth the money they charge?

By Julie Stav

Your credit carD Companies may offer you credit card protection insurance under a variety of names such as credit shield, payment protection, or credit safeguard, among others. But no matter what they call it, this insurance is designed to provide the cardholder with the benefit of covering required monthly payments on your credit card should you lose your job, die or become incapacitated.
The benefits of each policy depend on the type of policy you have. There are three major types of credit card insurance:
• Credit life insurance: This policy pays the balance of your card in case of death, provided you assigned the credit card company as the beneficiary.
• Credit disability insurance: Also called accident and health insurance, this is a type of medical disability policy that only covers the minimum payment due on your card each month, and only for a specified period of time. For major illnesses, you may have to be employed for a minimum of 20 hours per week in order to become eligible for coverage.
• Credit unemployment insurance: This policy will pay the minimum monthly payment due on your card should you become involuntarily unemployed. You may need to be unemployed for a specified number of days before you can receive benefits.
Be aware that, in case of disability or unemployment, the unpaid balance on your card will continue to accrue interest, so your debt may very well increase over time. Also note that the insurance company will generally issue payments only until you reach the maximum benefit in your policy —generally between $5,000 and $20,000. And, if you have more than one credit card, you must purchase a separate insurance policy for each one.
Although state insurance commissioners set the maximum rates on credit insurance, the typical going rate is 75 cents for each $100 of loan coverage per month. This would mean that if you have a $4,000 balance on your card, it would cost you $30 per month to insure it. Over the course of one year, you would have spent $360 for a $4,000 benefit.
There is no way to comparison shop with credit insurance. You either buy it from the company lending the money or credit, or you don’t buy it at all. So make sure to read the small print for things like premium rates, payout maximums and any restrictions for receiving benefits.
For many consumers, this coverage is very expensive and they would be better served by a traditional life and disability policy.
If you are interested in credit life protection, let’s compare the previous example to a term life insurance policy offered by a major life insurance company:
If you are a healthy, non-smoking man of 40, you could probably buy a $100,000, 10-year level term coverage (which means that your premiums would not change for 10 years) for less than $200 per year, almost half the cost of your credit card policy and with 25 times the benefit amount.
People with lower incomes and those who are less educated usually use credit insurance. However, credit insurance may be the only protection available to someone who is not able to qualify for an insurance policy anywhere else. Credit insurance programs are group policies that usually do not require disclosures of medical history or health condition.
Your goal should be to find out what insurance coverage you and your family need, not just to cover minimum monthly payments for a limited period of time, but to protect your assets and your family’s standard of living and, of course, pay off those credit cards as soon as possible.

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