Ever wonder whether or not you should buy credit card insurance to protect you in the event of an emergency? No, we aren’t talking about having your credit card stolen; instead, we mean job loss or death. Stop wondering. Save your money and set up an online account with your card company. Like most accounts, you can personalize your preferences to notify you by text or email whenever your credit card balance hits a certain threshold. Should that happen, you’ll be alerted and can then notify your bank or card company to tell them that the card is in a criminal’s hands. They’ll issue you a new card, cancel that lost one, and conduct a thorough investigation to try to find the thief.
What Historic Data Has to Say
In order to figure out whether this kind of insurance is a good deal for consumers, groups such as the Government Accountability Office and Consumers Union measure what is referred to as the “loss to benefit ratio.” Loss ratios vary by type of insurance, but
- The loss ratio is the percentage insurance companies pay out in claims compared to how much consumers pay for their coverage. What statistics reveal is that for every dollar Americans pay for credit card insurance, they only receive payouts of about 25 cents or less.
- Experts generally agree that the lowest payout ratio consumers should accept is 60 percent – not the 25 percent or less that a payout of 25 cents on the dollar represents.
- To put that into perspective it helps to refer to the historical statistics regarding the ratios for group life insurance (90 percent), group accident and health coverage (75 percent), and automobile insurance loss (70 percent).
In the meantime, The Fair Credit Billing Act will protect you because under this Act, your liability is capped at $50. Not only that, but most credit card companies don’t even charge the $50 if you are quick to report the loss or theft because that makes them seem insensitive and stingy. Waiving that $50 liability also helps to ensure that you’ll be satisfied and remain a loyal cardholder. Consumer loyalty is worth a whole lot more than 50 bucks these days.
Here a few of the products commonly marketed to those who carry plastic:
- Death Benefit Insurance-These policies promise to pay off up-to a certain amount of your credit card balance if you die. That way your survivors or heirs are not held liable for those outstanding financial obligations. If you really want to protect your beneficiaries, buy life insurance and make sure it provides at least enough protection to cover whatever debts you plan to carry on your plastic.
- Credit Disability Insurance- What if you have an accident or health problem that causes you to become disabled? You can buy coverage that will make your monthly payments for you. The problem with this kind of insurance is that the policies typically pay only your minimum monthly payment, so it does nothing to reduce the actual amount of your debt. This level of coverage will just help you postpone paying off your credit card until you recover. A better plan is to set aside some money in a savings account for that kind of scenario – or to use the money you’d spend on insurance to pay off your plastic once and for all.
- Involuntary Unemployment Insurance- Here we have another product that puts a different spin on it by promising to make those minimum monthly payments for a specific period of time while you’re out of work. Millions of people paid for this kind of coverage during the recent recession, for instance, as unemployment levels skyrocketed. Plenty of those people also found that it didn’t provide the level of coverage that they needed or expected.
- Insurance for Purchases- You can also buy extended warranty coverage so you’ll be reimbursed in the event your purchased product is faulty. Buying extended coverage can be redundant, because almost every product worth covering is already covered by a manufacturer’s warranty. If the product is going to fail, it will probably fail as soon as you get home from the store – or within 30 days or so.
The bottom line is pretty clear and straightforward once you crunch the numbers and study the details. The cost of credit card insurance can add up to a real windfall for the card issuers and banks, and instead, you could use that money to pay down your card balances.