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Steve Bucci, the Bankrate.com Debt AdviserKnow the 4 types of credit card insurance

Dear Debt Adviser,
What is your feeling about the necessity to purchase credit card insurance? I did not used to feel it was necessary until I lost my job last fall and have only been able to obtain part-time employment at less than half of what I was making. Could you offer some advice on questions to ask the credit company prior to authorizing the purchase of the insurance?
-- Brian

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Dear Brian,
Insurance needs tend to be very specific to a person's life situation, and credit card insurance is no different. Having said that, the insurance sounds wonderful for the scenario you describe of losing a job and half your income; however, the credit card insurance might not kick in, as you would hope.

First, let's agree on what credit card insurance is and how it might or might not benefit you. Four major types of credit insurance are offered: life, disability, involuntary unemployment and property.

  • Credit life insurance

  • will pay the amount owed on your card at the time of your death, so long as the card company is named the beneficiary of the insurance.
  • Credit disability insurance

  • will cover the minimum payment due on your card for a specified period after a medical disability. New purchases after you become disabled are not covered.
  • Credit involuntary unemployment insurance

  • will pay the minimum amount due on your account if you are laid off or downsized for a specified period. New purchases after you become unemployed are not covered.
  • Credit property insurance

  • might come with your credit card and usually provides payment for items purchased with the credit card if the items are destroyed or, in some cases, stolen.

As you can see from the above, one shortcoming of disability or unemployment credit card insurance is that the payment made by the insurance is only your minimum payment and usually only for a very limited period. Another drawback is that if you have several credit cards you have to purchase separate insurance for each card.

A better alternative for you might be your everyday, ordinary term life or disability insurance. You might receive better coverage at a cheaper price, and once the insurance has paid your credit card your dependants would receive the remaining amount.

Questions to ask your card issuer before purchasing insurance:

  • What are the situations where they pay and those where they don't?

  • Are there any age restrictions for life or disability insurance?

  • What are the requirements for each policy? For instance, what if you miss a payment or your account is not in good standing at the time you file a claim?

  • Can you purchase only one or two coverage options or do you have to purchase all?

  • What is the annual cost of the insurance, and how often can rates increase?

  • How do you cancel the policy?

If you decide to purchase credit card insurance, or any other insurance for that matter, be sure you know exactly what you are getting and exactly what it will cost over time.

While your case may have been covered because of your unique situation, for most people credit insurance is expensive and rarely pays off. I would definitely not place credit insurance in the "need" category. An emergency savings fund for this and other unexpected expenses is preferable in my book.

Caution: Many scams abound with people calling to supply you with credit-loss protection from your card issuer. The scam artist will tell you they need your card number and expiration date to issue the insurance. Credit card loss-protection insurance is not necessary; you are generally only responsible for a maximum of $50 of fraudulent charges and then only if you don't report the loss to your issuer in a reasonable amount of time.

Good luck!

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of Credit Repair Kit for Dummies. Visit MMI for additional debt advice or click here to ask a debt question.

Bankrate.com's corrections policy -- Posted: Jan. 27, 2006
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