Credit Balance Insurance: Is it for you?
CBC recently ran a story on hidden charges on credit cards and highlighted a new insurance product on the market called credit balance insurance. As the story indicates, part of the issue with this insurance is the dubious sales techniques engaged by the credit card companies; specifically, credit card holders are being charged for this insurance without their consent worldwide. Assuming you actually have a choice on purchasing this insurance, what is it and is it for you?
For brevity, I only highlight some main points. Here is an example of an informational pieces on credit balance insurance circulated by one of its carriers (I am not supporting or not supporting this institution; they just happened to have thorough sales literature on the topic).
Credit balance insurance is a type of insurance that covers the insured’s outstanding balance on their credit cards in the event death, disability, critical illness and involuntary loss of employment. The CBC article is incomplete in addressing what happens in one of these occurrences.
It is correct in stating that in the event of involuntary job loss the insurance ONLY covers the minimum payments and not the balance outstanding. In other words, the insurance only pays enough to keep your credit cards in good standing. Like any other insurance, there is a maximum monthly benefit and a maximum payout benefit (the link I cited indicated $750 maximum monthly benefit and $25,000 total benefit in the event of job loss; I noticed other policies only had maximum payout benefits as low as $15,000).
In events of death and critical illness, it will pay the balance on the credit credit UP TO the maximum benefit and NOT necessarily the balance on your credit card. In other words, if your credit card balance is quite high and you either pass away or have a critical illness, the insurance may not cover the entire balance.
In looking at any insurance policy, you look at what it does not cover more than what it covers and here are some of the weaknesses of most credit balance insurance policies:
- If you already have sufficient life insurance, disability insurance or critical illness insurance coverage, credit balance insurance is most likely redundant given those policies may cover what credit balance insurance covers and more;
- There is no coverage if you are not in good standing with your credit card (i.e. you did not make your minimum payments), if you have a pre-existing medical condition, you resign from your job or you were an employee with a fixed term contract;
- In some policies, coverage ends for involuntary job loss when you return to school or enter retraining; and
- I could not find a return of premium rider anywhere so you are not getting your money back if you never claim on the policy.
For those subject to involuntary job loss, the more practical solution may be to use a line of credit to wipe out the balance than to rely on credit balance insurance. Remember that in these instances, the insurance only pays the minimum balance so interest continues to accrue at very high interest rates. You may be better financing your debt by applying the line of credit, with lower interest rates, to credit card debt and carrying the line of credit with more favorable terms.
What about costs of the policy? The formula is based on how much your outstanding balance is every month. For example, one carrier had a formula of 94 cents for every $100 of outstanding credit card balance.
This product seems ideal if you have no insurance coverage and carry very little balance month to month. Otherwise its coverage seems limited. But, as usual, it pays to read the terms and conditions before you buy since each insurance provider has slightly different terms.
Equally important, please make sure to check your credit card statement to see if this premium is being charged against your will.