Do you need credit card insurance?
By Andre Mayer • Bankrate.com

A credit card is a safety net of sorts, a fail-safe method of disbursement when you just can't muster the cash. So what happens when circumstances hinder you from meeting your minimum monthly payments, when your safety net suddenly becomes a snare?

One option many card issuers offer is balance insurance.

Credit card balance insurance is designed to cover you in the event of a grave injury, disability or accidental death. If you're wounded and unable to work, chances are you'll have trouble paying your credit card bill. With balance insurance, the insurance company will make the minimum payment for you.

It sounds like a great deal, but protection comes at a cost. Read on to determine if it's worth the extra monthly payment for you.

Coverage for major illnesses and death
In order to receive such coverage, credit card companies set out a number of conditions. At the time of the incident, you must have been employed for a minimum of 20 hours a week. Also, be aware that the insurer will only pay off your minimum payment until you reach a maximum benefit (generally between $5,000 and $20,000) or return to work, whichever happens first.

In the case of death or a critical illness, the insurer will pay off your entire balance, so the onus doesn't fall on surviving family members.

This, too, comes with a few caveats. Coverage is limited to major afflictions such as cancer, paralysis, muscular dystrophy and the like. Again, the credit card company will only pay off your balance to a maximum amount (also typically between $5,000 and $20,000).

The biggest advantage of balance insurance is that it enables you to maintain a solid credit rating while incapacitated. Doing so keeps you in good standing with creditors, but it doesn't do any favours for your wallet.

Minimum payments are generally between 2 and 3 percent of your balance, which means that interest still accrues on the other 97 to 98 percent of what you owe.

Premiums vary widely
Furthermore, coverage doesn't come for free. As with any form of insurance, there's a premium. Levied on a monthly basis, the credit card premium is calculated by multiplying a set fee by your outstanding balance. The higher the balance, the higher the premium, and vice versa.

If the card's premium was $0.90 (the industry average as of June 2004) and your balance was $2,500, you'd pay $22.50 (or $2,500 divided by $100 times $0.90) for that month. If you didn't touch the balance for an entire year, you'd pay $270 ($22.50 times 12 months).

Terrie Tweddle, a representative for Visa Canada, says it's the issuers -- such as banks and department stores -- that determine the premium rate, so fees vary from issuer to issuer. At the low end is TD Canada Trust, which charges $0.69 for every $100 of outstanding balance; The Bay, meanwhile, levies $1.29.

Most people apply for balance insurance when they first sign up for a credit card, but you can ask your issuer to start coverage at any time.

Considering the size of the premium, it behooves consumers to scrutinize their cardholder's agreement to determine, for example, whether the insurance covers their spouse or other supplementary cardholder(s).

One key point is that most cards will not offer the insurance to consumers over the age of 70; some even deny coverage to those 65 and older.

Check for insurance overlap
While credit card companies make a lot of noise about the convenience and peace of mind balance insurance provides, Jean-Guy St-Amour, a consumer education officer at the Financial Consumer Agency of Canada, cautions people to consider whether their credit card balance could be settled by other means.

You may have lost your main revenue stream, but perhaps you have secondary money sources (such as savings or investments) or other coverage.

"Maybe that minimum payment could be covered through your disability insurance with your employer," says St-Amour. "Or you could have disability insurance on your mortgage." It's worth looking into because there's no point in paying for the same coverage twice.

Should you have the unfortunate luck of becoming afflicted and thus unable to meet your credit card payments, be sure to keep all documentation of your infirmity. You'll have to include it in your insurance claim.

Know, too, that in most cases, benefits commence 30 calendar days after loss of employment, not immediately.

Andre Mayer is a writer in Toronto.