You call your credit card issuer, and the customer service representative tells you about a “special offer” for a “payment protection plan.” What do these plans cover, and do you need one?
“Payment protection plan” is another name for credit insurance. You can buy four types of credit insurance:
- Credit life, which will make payments on your credit card or loan if you die,
- Credit disability, which will make payments if you become disabled and cannot earn a living
- Involuntary unemployment insurance, which will make payments on your credit card or loan if you involuntarily lose your job, and
- Credit property insurance, which will pay to repair or replace personal property you buy with the credit card or loan if it is lost, damaged or stolen. Many card issuers, such as American Express, automatically include this type of coverage with some of their cards — check your cardholder agreement for details. Unlike with the other three types of credit insurance, this coverage has no relationship to your ability to pay off your debt.
So what exactly is credit insurance? Except for credit property insurance, credit insurance is a form of decreasing term insurance. Like term life insurance, it will pay a benefit if the event insured against (death, disability or job loss) occurs within the policy term.
Many financial experts recommend skipping the credit insurance and simply ensuring your life and disability insurance limits are high enough to cover your debt payments. For many people, this makes sense. Term life insurance has become less expensive over the last decade or so, and if your health and finances permit, term life and disability insurance can cost less per thousands of coverage than credit insurance.
Credit insurance has other disadvantages. With life and disability insurance, policy proceeds go to your family or you, to spend as you choose. With credit insurance, benefits go directly to the card issuer or loan holder — your family will see nothing. And, if the cost of credit insurance is added to your loan balance, you will pay interest on these premiums.
However, credit insurance does have its place. Sometimes a health condition prevents individuals from buying affordable life or disability insurance. Most credit insurance does not require underwriting. If you are between the ages of 18 and 65 (70 in some states) and have not been diagnosed with a terminal disease, you can obtain coverage, and you will pay the same rate as other eligible borrowers.
Life insurance also has relatively high minimum coverage amounts — most insurers will not write a term life policy for less than $50,000. If your loan or credit card balance is much less than that, you might not want to pay for the additional coverage.
How Much Does It Cost?
Before buying credit insurance, ask the following questions: Will the premium be financed as part of a loan? If so, it will increase your loan amount and you’ll pay additional interest and more for points (if your loan carries points). Can you pay monthly instead of financing the entire premium as part of your loan? Will the insurance cover the full length of your loan and the full loan amount, or will your premiums drop as your balance drops? Is there a waiting period before the coverage becomes effective? Can you cancel the insurance? If so, what kind of refund is available?
Before you sign any loan papers, ask the lender whether the loan includes any charges for voluntary credit insurance. Lenders can’t deny you credit if you don’t buy optional credit insurance or for not buying it directly from them. If a lender tells you that you’ll only get the loan if you buy the optional credit insurance, report the lender to your state attorney general, your state insurance commissioner or the Federal Trade Commission. And before you decide to buy credit insurance, please call us for a quote on term life insurance. Rates have been going down for the last several years, so coverage may be less expensive than you think.