Debtor and Creditor

Credit Insurance for Outstanding Account Balances

In February 2009, the U.S. jobless rate reached 8.1%. This is the highest unemployment rate since 1983. Almost two million jobs have been lost in the last three months. You may be concerned about your own job security and how you are going to pay your bills. If you have a lot of credit card debt, you may want to find out if credit card insurance is right for you.

Credit card insurance is an option that a credit card company offers its card holders. If you sign up for credit card insurance, payments are made on your outstanding credit card balance if you're unable to do so under certain circumstances. The monthly premium for this insurance is deducted from your available credit card balance.

Types of Credit Card Insurance

Opting for credit card insurance sounds like a responsible thing to do, so should you sign up? First, it's important to understand the various types of credit card insurance available. There are four common types of credit card insurance:

  • Unemployment credit insurance
  • Disability credit insurance
  • Credit life insurance
  • Credit property insurance

Unemployment and disability credit insurance are similar. If you lose your job due to downsizing or layoffs, or you become disabled, the minimum payment on your existing credit card balance will be paid for a certain specified time period, for example, 12 months. However, if you use your credit card after making an unemployment or disability claim, any additional amount charged to your card won't be covered.

One advantage of obtaining unemployment or disability credit insurance is that it protects your credit rating while you are unable to make payments. However, while the insurance policy may pay the minimum payment on your credit card balance for a specified number of months, the interest keeps adding up, and you may end up with a bigger balance than when your unemployment or disability began.

Credit life insurance guarantees full payment of your credit card balance if you die. This type of insurance protects the credit card company, which would otherwise sustain a loss if it was stuck with a large credit card balance that can't be repaid from your estate. In addition, it protects your estate from a claim by the credit card company for your outstanding credit card debt.

A credit property insurance policy insures items you purchase with your credit card. If the item is destroyed, you won't be responsible for repaying any amount that you still owe for the item.

Examine Your Situation

Look at your personal and financial situation to determine whether you should sign up for credit card insurance. If you have a traditional life or disability insurance policy, your credit card balances may already be covered in case of disability or death. In addition, if you have many credit cards, you would have to purchase a separate insurance policy for each card. This can be costly. The credit card insurance premium is calculated as a percentage of your existing balance, such as 75 cents for each $100 of outstanding debt. Thus, if you have a $2,000 balance on just one of your credit cards, the premium would be about $15 each month. The monthly cost for insuring all of your cards would likely exceed the amount you would pay to purchase a traditional life or disability policy.

Read the Fine Print

If you decide to purchase credit card insurance, you must find out everything about the policy before you sign up. Do any exclusions apply to your situation? For example, will unemployment credit insurance cover you if you work part-time? Can you cancel at any time or are there cancellation fees? In addition, you must make sure the company that offers the insurance is reputable and reliable. If the minimum payment isn't made on time, you will incur late fees and your credit score will plummet. To be safe, don't agree until you have had a chance to read all of the fine print and determine whether the benefits outweigh the cost.

To sum up, credit card insurance has its advantages and disadvantages. If your job situation is stable and you are in good health, the cost may not be worth it. But if you are facing hard times and your job is at stake, credit card insurance may be your temporary solution to a difficult financial situation.

Questions for Your Attorney

  • How does credit card insurance factor into payments under a bankruptcy plan, if at all?
  • If my credit card insurance covers minimum payments in case of job loss or disability, can I pay additional sums on my account if I can afford to?
  • Are there any other sources of credit insurance, such as an add-on to my homeowner's insurance?
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