Credit Card Insurance
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You can buy insurance for your house, your car and even your dog. So, it shouldn’t come as a surprise that you can purchase insurance for your credit card, as well. In this section, we explain how credit card insurance works and what is/is not covered, so you can decide if it’s right for you.
What is credit card insurance?
Credit card insurance (often called balance protection insurance) is available through all credit card companies. The insurance covers part or all of your outstanding balance, in the event you can’t pay your bill for any number of specified reasons (as outlined in the policy). To get this insurance, all you have to do is call your credit card provider and request it, then pay a premium on each of your monthly credit card statements. If you make a successful claim in the future, the amount will be credited back to your account.
Why is the advantage of having credit card insurance?
In theory, having credit card insurance protects your credit score. In the event that you can’t work for some reason, your credit card provider would make at least the minimum payment on your behalf until you could, so your credit history wouldn’t be tarnished.
What situations are covered by credit card insurance?
There are a number of situations you could find yourself in, when you may be thankful you had credit card insurance. These include:
- Involuntary unemployment
- Serious injury
- Sickness or disability requiring hospitalization
What situations are not covered by credit card insurance?
Not all injuries, illnesses or episodes of involuntary unemployment qualify for insurance coverage. For example, if a pre-existing condition worsens, or if you had symptoms of a disease when you applied for insurance, you may be denied. In addition, loss of employment does not entitle you to a benefit if you resigned, were terminated with cause or were in a contract position. As well, most credit card companies require that you work a minimum number of hours to qualify for this insurance. Before you sign-up for credit card insurance coverage, or try to make a claim, it’s extremely important to read the fine print and understand the rules and restrictions.
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How much does credit card insurance cost?
Much like interest fees on your credit card, the cost of credit card insurance is calculated using the Average Daily Balance Method. This approach adds up all the daily balances on your credit card statement for a month, divides the total by the number of days in the month and then multiplies this number by the premium (which is a percentage rate).
The premium is usually 0.80-1.20% of the average daily balance. Note the amount you pay in insurance premiums is not fixed: as your balance increases or decreases, your cost will either rise or fall.
Let’s take a look at how this works in practice. Imagine Jane buys credit card insurance at a rate of 1.20% at the end of March. Her balances for April are as follows. How much will she pay for the insurance for this month?
|Insurance Billing Period||# of Days||Balance||Sum of Daily Balances|
|Day 1||1||$1,000.00||$1,000.00 x 1 = $1,000.00|
|Days 2-10||9||$4,000.00||$4,000.00 x 9 = $36,000.00|
|Days 11-15||5||$2,000.00||$2,000.00 x 5 = $10,000.00|
|Days 16-30||15||$3,000.00||$3,000.00 x 15 = $45,000.00|
We then divide the sum of the daily balances by the number of days in the month:
Finally, we multiply the average daily balance by the premium to arrive at the daily cost of the insurance:
For the month of April, Jane would pay $36.79 for her credit card insurance.
Taking our example further, imagine Jane has the insurance for twelve months, at which point she is in a car accident and is hospitalized for six months. If her credit card insurance covers 5.00% of her monthly balance until she is healthy enough to go back to work, how much will the credit card company pay out? Assume that she maintains an average daily balance of $3,066.66 before her accident.
To calculate this, we multiply her average daily balance by 5.00%, and then multiply this figure by the number of months she cannot work due to the accident:
What is the compensation provided by credit card insurance?
The compensation provided by your credit card insurance depends on the reason for making a claim. If you become critically ill or die, your entire balance may be paid off by the credit card company. In the event of involuntary unemployment or disability, the credit card issuer may only pay 5.00% (as an example) of your balance (the balance at the time you became unemployed or got injured) every month until you are better. They will generally continue to do so until either you are no longer disabled or they have paid out an amount equivalent to your balance at the time you were injured. The maximum compensation paid out is typically $25,000.]
Is credit card insurance worth it?
There are three instances when credit card insurance may not make sense:
- Do you normally only have small daily balances?
- Do you have large amount of savings?
- Do you have significant life and disability insurance already?
If you answered yes to any or all of these questions, chances are you do not require credit card insurance. If you only make small purchases and never carry credit card debt, you shouldn’t need this type of insurance. The same rule applies if you have a large amount of money in savings. In addition, if you already have life and disability insurance, odds are you already have sufficient coverage in the event that something happens to you.
If you answered no to all the questions, it doesn’t hurt to look into credit card insurance. However, keep in mind that over time you can end up spending a lot of money on this kind of insurance that otherwise could have been used to pay down your balance.