Is Credit Card Insurance Worth It?

In this unstable job market, credit card insurance sounds like a godsend. In the unfortunate event of a layoff, you need to know that your credit card bills will be covered. That’s what credit card insurance promises to you.

Credit card issuers ask you to sign up for credit card insurance promising that it will protect you when you become unable to pay your bill. For example, if you lose your job or become disabled, credit card insurance will make minimum payments on your credit card (thereby preserving your credit score and keeping debt collectors at bay). If you pass away, credit card insurance would take care of your entire credit card balance.

What’s the cost?

Credit card insurance, sometimes called credit card protection, varies in cost from $0.75  to $1.50 per month per $100.  So, on a credit card with a balance of $5,000, credit card insurance could cost as much as $75 a month. Three or more cards with that balance and you’d be paying $225 a month just for credit card protection. That may not be as beneficial as you think.

Credit card insurance premiums are paid in addition to your monthly credit card payment. One downside of paying for credit card insurance is that the money could be used to pay down your credit card balance. Or, you could let it accumulate in a savings account and then use that savings to make your minimum payments if you lose your job or become disabled.

What’s the catch?

Insurance only makes the minimum payment on your balance. So, it won’t help you make any significant progress in paying off your credit card. It’ll just keep you afloat, barely. If your finance charges are greater than your minimum payment, your balance could actually increase during the time that insurance is paying your bill.

Some people who’ve used credit card insurance complain that the insurance doesn’t always pay on time leading to late fees and interest rate increases.

Make sure you read the fine print of the contract before agreeing to the insurance. You may not be able to sign up if you’ve already lost your job or you’ve been with your current employer for less than two years. Past delinquencies and over-the-limit balances might also prevent you from signing up for insurance. Understand which situations the insurance covers and what type of documentation you’d need to provide to have a claim processed. Finally, know the cancellation policy: Are you able to cancel the insurance, and at what cost?

Smart alternatives to credit card insurance

Before you sign up for credit card insurance, consider the alternatives, like building an emergency fund to cover your minimum payments and other monthly expenses. If you’re considering credit card insurance to cover your bill in case of death, consider instead a term life insurance policy which can be used to pay off your debts and leave some money behind to your family members.