Credit Card Insurance BasicsA credit insurance plan is meant to cover the balance or the minimum payments on a particular line of credit that it is purchased for.
Plans differ, but a plan may, for example, cover the whole balance if the
credit holder passes away. If he or she gets laid off or becomes disabled, it may cover the minimum payments so the loan does not go into default.
If you have just signed up for a new loan, credit card, or retail line of credit, you may have gotten a very attractive offer to purchase coverage like this. At first, it may seem like a good deal because your balance will be covered for a few cents on the dollar. But you must understand that this product makes credit companies a lot of money, and it is something they rarely pay out on.
Read The Fine Print What are the exact terms? Are you likely to be able to make a claim?
If the plan offers to pay the entire balance off if you pass away, that may be very clear. However, it is more likely that you will be unable to make payments because you lose your job in the near future. If you read the details of exactly how can become eligible to collect, is that a likely situation in your own life?
Some people cannot collect on their claims because their own situation does not fall into the covered situations which were outlined in the plan when they purchased it. For example, a plan may require you to work at your job for x amount of time, and also be qualified for state unemployment benefits.
These plans may seem inexpensive because they offer to cover a balance for a small percentage of the total amount you owe. However, I have two concerns with that:
If you start out with a balance, you will start out with a credit insurance payment. This will add to your balance. It will also increase your monthly payments. A larger monthly payment and larger balance may take longer to pay off. Once you pay off the balance, you will not need the coverage.
Is it really a good deal? If you bought a regular life or disability policy, you would probably get a lot bigger benefit for your money. And that would be paid in cash that you, or your beneficiaries, could use in any way you want.
If unemployment is your concern, you could be better served by directing any extra cash into an emergency cash fund or into paying off your debt!
Should You Buy Credit Insurance?In some cases, credit insurance may be right for consumers. It is important to make sure that you would actually qualify to make a claim, and that the fees will not make it harder for you to get the debt paid off promptly.
However, in many cases, it is just an extra expense that will not ever really help you. Do not let yourself get hurried into making a decision, but take the time to read and understand the policy details.
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By Marilyn Katz
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