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Take No Risks With Credit Insurance

By Saddarth Nagaraj on January 27, 2011

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Credit insurance: the name itself makes the policy sound attractive. Surely an investment that offers to protect payments and safeguard my credit is worth making? Think again. Credit insurance is yet another financial option that is too often used by companies to make additional profits off existing account holders. Don’t be fooled into making a hasty judgment in favor of credit insurance; before making your decision, be aware of what the policy entails.

The apparent benefit of credit insurance is its role in protecting your credit rating in situations that are beyond your control and could severely damage your standing. These principally include death, redundancy, disability and property damage. The offers of security through suspended monthly payments and interest rates can be highly tempting, but all is not as it seems. To begin with, most credit card insurance agreements will only cover your minimum monthly payments, and are valid for a very limited time. Since minimum payments usually account for only 2-3% of your balance, interest will still accrue on the other 97-98% of your debt. Indeed, the primary reason for the promotion of protection insurance by credit companies is its extraordinary level of profitability to them.

There are four forms of credit insurance. The first, credit life insurance, comes into effect if you die. At that point, the debt balance that you owed at the time will be paid off. However, the company you owed your debt to will be the beneficiary. Credit disability insurance will cover your minimum monthly payments in order to protect your credit rating should you become medically disabled. There is also involuntary unemployment credit insurance. As the name suggests, it will provide your minimum monthly payment should you be laid off, or downsized. However, you should be cautious. In both cases, coverage will gradually cease after a number of further purchases. Credit property insurance (the fourth type) operates under very specific circumstances, and these are determined by the terms of your insurance agreement. This form of insurance cancels debt on items purchased with credit if they are entirely destroyed in certain ways that are explicitly stated by the company.

As you can see, credit insurance is highly flawed and provides inconsistent coverage. If you nonetheless choose to purchase protection insurance, take a few precautionary measures. Ask questions about all credit insurance policies that the company offers. The number of exclusions is likely to be high, and you will want to know the extent to which you can claim the benefits that are advertised. Finally, make sure you have an exit opportunity. Many credit insurance policies begin on a free-trial basis, but once you have begun the policy, it can be very difficult to cancel it. That said, familiarize yourself with the processes involved should you decide to opt out.

Financial security is something that we all seek, but attempting to gain it via the wrong means may actually destabilize us. In order to prevent that from happening, be wary of the promises offered by credit insurance. If you choose to proceed with a protection policy anyway, make sure you know what you’re getting into.

Many financial institutions offer credit card insurance to protect you in cases of unemployment or other qualifying circumstances. The premiums average around 85 cents per $100 monthly, or 10.2% of your balance. If you are already paying 25% APR in interest, you are actually paying over 35% for the privilege of carrying a balance.

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