If you carry a large revolving balance on your credit card, you might be nervous about what would happen if you were suddenly unable to make your payments. Major credit card companies offer credit insurance that would suspend your interest and payments for a period of time after a major life change. The insurance would eliminate your balance altogether if you are unable to work anymore due to an illness or injury. Unfortunately, credit card companies can make it very difficult for you to cash in on your insurance when you need it most.
How it's Supposed to Work
The general requirements for a credit card insurance policy are that you pay the additional premiums monthly and continue to make at least your minimum credit card payments on time. If you lose your job unwillingly, the insurance company will suspend your interest charges and premium payments until you find a new job. If you are injured or become ill, the credit card company will erase your debt entirely. Both of these options would allow you to maintain your credit rating without any punishment due to your change in circumstances.
It is not as simple as it sounds, though. Credit card companies have made it almost impossible to take advantage of the insurance because the exclusions and exceptions with each insurance policy are so complicated. Preexisting conditions are not covered at all. If you lose your job, you will have to prove that it was unwillingly or you will not receive coverage. Policy caps and other regulations contain loopholes that can protect the credit card company from complying with the insurance agreement and leave you struggling to continue to pay your bills.
Exclusions Not Available for Review Until After Enrollment
One of the most dangerous aspects of these complicated regulations and exclusions is that most credit card companies will not let you read them until you have already enrolled for the insurance coverage. It is possible that you would never qualify for the insurance coverage, but you will not realize it until after you have begun to pay the insurance premiums. Many customers across the United States have filed suit against credit card companies because this practice of withholding qualification information is being called unfair and illegal. It is a good rule of thumb to never sign any paperwork until you have read the fine print, including a credit card insurance plan.
Low Payout Rate
The tight regulations and difficulty in filing claims against a credit card insurance policy are clearly evident in the number of claims that are paid annually. Credit card insurance policies pay an average of 70% of the claims that are requested in a year. That is a dismal number compared to the 80-90% of claims that are regularly paid through other types of insurance companies. Even if you follow all of the rules and believe you qualify for a payout, you may not receive one in the end. The money you pay into a credit card insurance plan will likely never be seen again.
Coverage is Extremely Expensive
Most credit card insurance plans charge about $1 for every $100 of the customer's balance. Some companies charge as much as $1.50 per $100. That can add up quickly. If you are carrying a $2,500 balance and paying $1 for every $100, you would pay an additional $25 each month. In a year, that additional expense would be $300 toward insurance coverage that you will probably never be able to cash in on. You would come out ahead if you simply applied that additional $300 toward your balance rather than the credit card insurance.
Heather Hollingsworth is a single mother raising three teenagers while she attends graduate school and feeds a budding freelance writing career. She's always looking for a new way to stretch a dollar as far as it can go!