| Rebecca Lindsey is a staff writer for Credit Ratings.com.
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When sorting
through various files regarding credit cards, many people may happen
upon information regarding credit insurance. In fact, many
people may be paying for this insurance and not even realize that
they have it. Not a good idea—fees can sometimes be as high as $25
to $30 a month.
What is credit
insurance?
 In
a time when credit card debt is at an all-time high—up to $500
billion last year—many people turn to credit card insurance for a
little security. Consumer Reports reveals that yearly sales of
credit insurance total $6 billion.
Credit insurance is
a type of coverage designed to pay off the minimum monthly payment
in the event that a credit user cannot make their payments. Credit
insurance is offered more and more, so if you haven’t heard of it
yet, chances are that you will. It is offered by credit card
companies, banks, stores, car dealers…the list goes on.
The average rate of
credit insurance is around 75 cents for each $100 of loan coverage
per month. This means that if you carry a monthly balance of $3000,
the insurance premium would cost you around $22 each month. That may
not seem like a lot, but small sums add up: $22 dollars a month
costs you $264 a year.
There are
several types of credit insurance:
- Credit
disability insurance pays
on your credit card bills if you become disabled.
- Credit
involuntary unemployment insurance
pays on your credit card bills if you are fired.
- Credit
property insurance pays
to fix or replace items bought on credit or used as collateral.
- Credit
life insurance pays off a
debt if the borrower dies.
A typical credit
insurance policy offers:
- Voluntary
enrollment
- Cancellation
at any time
- Rates
regulated by the state insurance commissioner, regardless of
age, gender or health
- Premium
fee calculated on current monthly balance
- Benefit
of minimum monthly payment if borrower is disabled or unemployed
- Full
payment benefit in the event of death or dismemberment, with a
cap set typically at $10,000
- Personal
credit rating maintained in good order in the event of
disability or unemployment
The key thing to
remember is what most insurance offers don’t eagerly highlight: most
coverage pays only the minimum monthly payment each month.
So is credit
insurance worth the fee?
A strong debate
exists regarding credit insurance. Supporters of credit insurance
(usually those who offer it) say that it offers great protection for
some credit users. For instance, a consumer who carries a large debt
and who is in poor health may definitely benefit from the advantages
of credit insurance should they become too ill to work.
Critics argue that
it’s a grand money maker for companies that offer the insurance,
but a bad deal for consumers. They make a case that a life insurance
policy would cost the consumer less and pay out more benefits.
Indeed, the Consumer Credit Insurance Association notes that people
who earn a lower income and don’t have other types of insurance
are the people who tend to use credit insurance the most.
Consumer Reports
Online offers some key information on credit insurance for consumers
who want to know more. Their report illustrates loss ratio (the
proportion of claims paid by insurers to the amount of fees paid by
consumers) and how it affects consumers.
So is it worth it?
Again, it depends on your situation. Usually, however, the expense
of credit insurance outweighs the potential benefits. Because most
insurers pay only the minimum monthly payment when a claim is made,
a better alternative to credit insurance might be to pay down debt
and set aside funds for emergencies such as illness or job loss. As
always, being informed of all the options will help you make the
decision.
So take some time
to sort through those files and get organized.
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