Who Benefits From Credit Health Insurance? How Does It Work?

woman looking at credit card bills and credit health insurance

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What Is Credit Health Insurance?

Credit health insurance is a type of credit insurance offered by lenders that provides coverage for your debt in the event you, as the borrower, become ill and are unable to cover the costs of your loan or credit card monthly payments. Credit health insurance covers your financial commitment to the lender with whom you purchased the coverage if you are unable to pay due to illness. Credit health insurance is a form of critical illness or accident and disability insurance. Understanding what credit health insurance covers and who benefits from it will help you decide if credit health insurance is a good idea.

Credit health insurance is also known as Credit Disability Insurance or Credit Accident and Health Insurance.

Who Does Credit Health Insurance Protect?

The credit health insurance policy protects the lender from not being paid when the borrower is unexpectedly sick or unable to work due to illness, subject to the terms of the specific policy.

Who Is the Beneficiary of Credit Insurance?

The beneficiary of credit insurance is the lender. Your policy pays the value of your monthly payments to the lender.

Although the lender is the beneficiary of the payment, and you won't see any "money" come from a credit health insurance claim, you benefit indirectly because you won't have to deal with the stress of monthly payments or credit problems from missed payments.

Where To Get Credit Health Insurance

Credit health insurance is often provided by a card issuing company or a lender.

How Long Is a Credit Health Insurance Waiting Period

Each lender has a different policy, there's usually a waiting period before the policy kicks in. Some have a two-week waiting period, others have a 30 day waiting period. The benefits may be retroactive or not, depending on the agreement. It's important to ask and understand the terms of the payout.

How Much Does Credit Health Insurance Cost?

Each lender will determine the premium they set for credit health insurance, so there is no standard cost. Many credit card companies or lenders base the monthly price of the insurance on the balance of your loan or average daily balance and may charge a percentage or flat fee based on that.

Example of Credit Health Insurance

Credit card companies may offer you credit health insurance for a price based on your amount of debt or average daily balance. For example, if the monthly premium of the credit health insurance is $1 for $100 of debt or your average daily balance is $350, the cost of your credit health insurance can be $3.50 a month, or $42 a year. Does it make sense for you to pay $42 a year to protect $350 of debt? Would you have trouble making the monthly payments?

Now imagine If suddenly your debt goes up to a few thousand dollars, your annual costs for this insurance would be higher. Then you are looking at thousands of dollars of debt, the scenario may change for you since the value of the debt and financial burden it may cause you increases.

If you take credit health insurance for a brief time because you are concerned about your debts you are not committed forever. Review your needs regularly based on how your situation changes, you can usually cancel if you decide you don't need it anymore.

Other Options to Protect Your Credit Besides Credit Health Insurance

Be careful with the costs of the credit insurance and be sure and compare it to other options you may have to protect yourself:

Although the above options do not pay the credit card company directly, they pay you, and this allows you to decide how and when to spend the insurance benefits you are receiving.

Credit Insurance Costs vs. Disability, Life or Critical Illness Insurance Plan

Depending on the amount of your debt and who you buy your credit health insurance from, it may actually cost you more money to pay for credit health insurance from several lenders than it would to just buy a disability insurance policy or critical illness policy that could give you the money to make your monthly payments.

Do You Have to Take Credit Insurance?

A lender might tell you it is recommended (or requested) by the lender to take credit health insurance in some circumstances. If you have other insurance covering the same thing, like life insurance, disability or critical illness insurance, you can always let the lender know this and see if they will waive the credit health insurance requirement.

Should You Get Credit Insurance? Questions to Ask Before You Buy

  1. Do you have other insurance like life insurance, disability, or unemployment insurance that would cover you enough to handle your debt if you needed it?
  2. How much will loan payments increase due to the cost of the credit insurance?
  3. Will the credit health insurance cover monthly payments or pay off the entire balance? What are the conditions required in order to be paid?
  4. How long is the waiting period before the insurance starts paying you?
  5. What isn't covered by the policy?
  6. Ask under what circumstances can the coverage be canceled by them, for example, if your monthly payment is past due or other reasons.

When your credit debt is low, it may seem like a small amount to pay, but when you look at the big picture, it may not make sense in your overall financial plan. When looking at credit health insurance be sure and look at your other options like life insurance, disability insurance, and critical illness which may give you more flexibility and pays you instead of the lender.

Review your insurance needs regularly to make sure you aren't overpaying or duplicating insurance for no reason.