If you have a credit card, chances are you’ve been offered balance protection insurance. The sales pitch seem appealing – credit card companies say they will be there for you in the event that you run into financial difficulties and are unable to pay your outstanding balance. At first glance balance protection insurance seems like a wise investment, but is it really all it claims to be? Let’s take a closer look.
What is Credit Card Balance Protection Insurance?
Repaying debt can be tough, especially when you run into financial difficulties. Whether you’ve been laid off from work, you become ill, or you suffer a critical illness, balance protection is supposed to be there to save the day. Similar to other forms of insurance, you’ll have to pay an insurance premium to be covered. Your insurance premium is based on your outstanding balance – the more you owe, the higher your premiums.
Here’s how TD Bank pitches its credit card balance insurance for TD credit cards: “TD Balance Protection Plus and TD Balance Protection Insurance are two credit protection insurance products designed to assist in managing your credit obligations on your TD Credit Card(s) in the event of a covered involuntary unemployment, loss of self-employment income, total disability, loss of life, dismemberment, critical illness or disability requiring hospitalization.”
What’s the Catch?
Just like other forms of insurance, credit card companies wouldn’t be selling balance protection insurance unless they turned a profit. If you’re considering getting balance protection insurance, it’s important to read the fine print, as all plans aren’t created equal. The events that are covered vary by credit cards companies; for example, you’ll have to fork over higher premiums for TD Balance Protection Plus if you want additional coverage for your spouse and for disability requiring hospitalization.
Not only do the events vary between credit card companies, the coverage varies, too. Some credit balance companies only cover your minimum payment, while others will pay off your entire balance. For example, if your credit card company only covers the minimum balance, you could be paying hundreds of dollars a year in insurance premiums for covering your minimum balance – 2 per cent or $20, whichever is greater – talk about an overpriced insurance policy!
Similar to mortgage insurance, balance protection insurance lacks the flexibility of disability or critical illness insurance. With the latter you can use your insurance payout as you see fit, but with balance protection insurance you’re limited to only covering your outstanding balance. Although credit card debt is one of the highest rate forms of debt, there are other forms of debt like payday loans that may make sense to pay off first.
In most cases you’re better self-insuring yourself against life’s curveballs. The easiest way to self-insure yourself is with adequate life insurance, disability insurance, and an emergency fund (three to six months’ living expenses). With those in place, you should have enough of a financial cushion to avoid balance protection insurance all together.