5 Step Guide to Considering Credit Insurance by a Credit Card Company

Patient giving insurance card to receptionist of dental surgery
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If you own a credit card, you have probably been asked by the company if you would like to add credit insurance. Credit insurance may be beneficial in some cases or an unneeded cost in others, depending on your situation and how much insurance coverage you already have. This is the basic information to consider when trying to decide if buying credit insurance is worth it.

What Is Credit Insurance or Payment Protection Insurance?

Credit insurance, sometimes referred to as payment protection insurance is an insurance policy attached to a specific loan or credit card account that will pay the balance or payments for you if you are unable to do so.

Knowing what credit insurance is can help you make an informed decision. Here are 5 Steps to help you understand the coverage offered by your credit card company and what it covers so you can decide if you should add credit insurance to your card or not.

1. Become Knowledgeable About What Credit Insurance Is

When your credit card company calls to offer you credit insurance, or balance protection insurance linked to your credit card, they may be working with an insurance company to offer a special package to their cardholders that will protect several different things.

Four Main Types of Credit Insurance:

  1. Credit life insurance pays off the debt you owe if you die. The beneficiary of the policy is the credit card company. If you have life insurance that is enough to pay off your debts if you die, consider this before spending more money on this extra coverage.
  2. Credit disability insurance protects your credit rating by making your monthly minimum payment if you become medically disabled. Usually,​ there is a limited period that payments are made for, and any purchases after the disability can be excluded.
  1. Involuntary unemployment credit insurance will pay your minimum monthly payment if you are laid-off or downsized, and again, purchases after the involuntary unemployment would not be covered.
  2. Credit property insurance is used to insure the property that you may have used to secure a loan. This would not usually be part of credit card insurance, but may be more common with personal loans where your personal property is used as security on the loan. It is important to understand the term, and also to realize that if you have home insurance or personal contents insurance, then that property would likely already be insured there.

    2. Know How Credit Insurance Is Marketed

    Now that you know a little more about credit insurance it is important to understand how it is marketed or sold to consumers. Usually, companies will ask you to purchase it when you sign-up for the credit or in a later telemarketing solicitation. When credit insurance is purchased it is offered free for a specific time, after this specific time you will start being billed because accepting the trial means automatic enrollment in the program (until you cancel).

    Unlike a lot of insurance plans, credit insurance can start by a verbal "yes" and does not necessarily require a signature so make sure you pay attention to what you are agreeing to or filling out on your credit application.

    3. Decide If Credit Insurance Is For You

    Considering your current and future financial needs is the first step in determining if you might benefit from credit insurance. If you already have substantial life and disability insurance policies, you may have enough insurance coverage in those policies to cover your credit accounts due to your death or disability. Learn more about figuring out how much insurance coverage you need here.

    Credit insurance may not be as cost-effective and or flexible as traditional life and disability policies. For example, if you have a lot of credit cards you would have to take out a policy on each of those accounts. With all those monthly policies, you may be able to purchase a traditional life and/or disability policy for less and get more coverage, not to mention after your credit balance is paid with a traditional policy your dependants would receive the remaining amount.

    4. Questions to Ask Before Buying Credit Insurance

    If you decide that credit insurance is for you, it is important to know about the policy you are getting.

    • Ask about what is excluded in the policy.
    • If you purchase a credit insurance policy that encompasses all 4 types of credit insurance (life, disability, unemployment, and property), make sure you are not paying for something you don’t need. For example, if you are not employed at the time of getting the unemployment insurance you are paying for coverage that you will not use.
    • Beware of age restrictions, for example with credit life insurance.
    • Ask about waiting periods and pre-existing situations. For example, if you think you might be laid off in 6 weeks and this is why you take the insurance, beware that the policy may have a waiting period (sometimes excluding incidents that started for up to 6 months before the policy and after). Time limits and waiting periods may cause a claim to be denied.

      Make sure you research all the requirements carefully before accepting the policy. If the person you are speaking to can not answer your questions, then ask to have someone call you back who can. Never buy a policy that you do not understand.

      5. Find Out if You Can Easily Cancel Credit Insurance

      Most credit insurance starts on a free trial basis. Before the free trial is over, you should decide if you want to keep the policy or not. Unfortunately, after the free trial period, it may be more difficult to cancel a credit insurance policy. Contact the credit card company if you are not sure how to cancel and get the appropriate instructions.

      Alternatives to Credit Insurance

      Credit insurance is not mandatory, you should not feel forced to buy it. Credit insurance covers is limited because it only helps you with the one credit card. If you are really worried about covering credit card costs due to disability, death or job loss, it may be a smarter financial move to consider other options that will let you control where the money gets spent if you need help. Credit insurance is limited to paying off a limited amount of debt with the creditor in question. Consider learning more about term life insurance, or disability which would give you more control of your finances.