Credit cardholders are asked repeatedly to sign up for credit card protection insurance offered by the issuing bank. Economic uncertainty is one of the primary reasons that cardholders will agree to pay monthly fees just in case something happens. Even if the cardholder does not carry a monthly balance, the bank is successful in selling the insurance. Credit card protection insurance is not as common as a more standard type of insurance like car insurance so care should be taken to understand the details. Prior to agreeing to sign up for the credit card insurance program, there are some facts that every cardholder should know.
Who Benefits from the Insurance Coverage?
Based on the program documentation, the credit card issuer will receive more benefit from the credit card protection insurance program than the cardholders. The structure of these insurance plans ensures that very few cardholders would qualify to have their payments covered. Most banks have designed these plans to bring in large sums of revenue every month to compensate for their recent losses. Banks benefit in the following ways:
- Fear Factor – Many cardholders are agreeing to carry credit card protection insurance even if they do not carry a credit card balance from month to month. If a life event occurs and credit cards are used for living expenses, the insurance is supposed to cover the payments. Banks that have lost the most money in recent financial events offer some of the most expensive programs because they can make up some lost income by leveraging the fear that exists within the marketplace.
- Loopholes – Financial institutions have extensive legal teams that are adept at wording contracts to exempt the bank from being obligated to pay the benefits as stated in the insurance documentation. Most cardholders find that the fine print exempts all life events that do not fit exactly into the scenarios defined in the documentation. Those loopholes are written to prevent the bank from being obligated for the most common life events encountered by cardholders.
- Monthly Cash Cow – Credit card protection insurance rates are stated in pennies per 100 dollars of outstanding balance. Most cardholders do not consider the monthly expense of the insurance premium and additional feels that are added to outstanding balance. Insurance premiums are not added to the minimum payment amount, but are added to the balance and will increase the interest income from each account with the coverage.
Read the Fine Print
Even detail-oriented cardholders are surprised to find out that their credit card protection insurance does not cover their credit card obligations. Carefully titled paragraphs lead the cardholder to believe that certain life events will be covered by the insurance, but the supporting paragraphs explain all of the specific variations of the event that allow the bank to decline the coverage. The following exemptions are designed to avoid insurance payments:
- Unemployment – Under the credit card insurance plan, the cardholder expects to be covered in the event of the loss of a job. If the cardholder is dismissed for performance reasons, the credit card company has a loophole in the documentation to exempt them from paying the benefit. Leaving the job voluntarily also negates the plan coverage.
- Disability – Another possible life event would be disability that prevents the cardholder from performing the skills of their profession. The disability section of the documentation contains a loophole for the person who can perform work of some type. If a surgeon’s hands are badly damaged in a car accident, he is still considered able to flip burgers. The loss of income is not considered, and the credit card company is able to deny payment.
- Other Insurance – If the cardholder carries life or disability insurance, those primary policies must pay out their benefits prior to the bank having to pay from the credit card protection insurance coverage. People who do not have these prior coverage policies would benefit from credit card protection insurance more than people who do.
Actual Costs of the Protection Insurance
Financial institutions use a strong marketing tool to entice cardholders to believe their credit card protection insurance programs are affordable. Insurance premiums are stated in terms of a few cents per 100 dollars of outstanding balance.
- Minimum Monthly Payment – For those who qualify to receive the benefits from the credit card protection insurance plan, only the minimum payment is made on the account. This action prevents the account from falling into an overdue status and prevents impact on the credit history and score.
- Interest on Outstanding Balance – Because the minimum payment is made each month, all additional interest will continue to accrue on the outstanding balance. As the balance increases, the total amount of monthly interest charged on the account will increase.
- Premium Costs – A $5000 balance would require a monthly payment of $30 to $50, which would add up to an additional $360 to $600 per year. The program documentation will say that the premium is between 35 cents and 50 cents per $100 of outstanding balance. Many cardholders are not aware that the premium amount adds up very quickly. Plan documentation will state that the credit card account with a zero balance is not charged the monthly premium.
Final Recommendations
Cardholders would be wise to consider another option instead of the credit card protection insurance offered by the credit card issuing bank. Instead of paying the monthly insurance premium each month, apply the same amount to the minimum payment and repay the outstanding balance as quickly as possible. The best insurance against the unknowns of the future is to live within the monthly household income and have a savings plan for unexpected events. Credit card protection insurance is for people without any other options for insurance coverage. The fine print must be understood by every cardholder to prevent surprises when life events change the household income.
