Insurance: Credit card balance insurance is not for everyone
By Bill Knight
Know your needs
If you apply for a credit card these days, you will probably be offered something called Credit balance insurance. This kind of insurance can provide some coverage of your credit card balance in the wake of unexpected events, such as a serious injury, disability, accidental death or job loss. If you usually carry a large balance from month to month on your credit card, this kind of insurance might hold some appeal for you.
Credit balance insurance is not for everyone, though. It is fairly expensive and comes with several conditions and limitations that you should be aware of. Depending on your situation, there may be better kinds of insurance available for you.
Do you need credit balance insurance?
Credit balance insurance is optional and is never a condition for getting a credit card. Considering the coverage it offers, this type of insurance is more expensive than regular forms of disability or life insurance. You might not need it if you are covered in other ways. For example, if:
- you are covered by another life insurance plan that will help pay off your debts in case of death or a disability (for example, through your employer);
- you will have enough income from other sources (for example, from rental property, accumulated savings, or investments) to make your minimum credit card payments if you become ill or lose your job.
What kind of protection does it give you?
You must be less than 70 years of age to qualify for this kind of insurance. It essentially offers protection in two kinds of situations:
Injury, disability or job loss
If you become injured, disabled or lose your job and you have trouble paying your credit card bill, the insurance company will not pay off your entire balance, but it will make the minimum payments on your credit card for you. This can prevent damage to your credit rating during the time you are unable to make your payments. The following terms and conditions will usually apply:
- The insurance company will make your minimum payment until you return to work (in some cases for a limited time period of up to 24 months) or until a maximum benefit is reached (usually between $5,000 and $50,000) - whichever comes first.
- At the time of your injury, disability or job loss, you must have been permanently employed for a minimum number of hours a week (usually at least 20).
- Your account must be in good standing.
Death or critical illness
If you die or have a critical illness, the insurance company will pay off the credit card balance owing at the time of your illness or death, so that your family members do not have to pay. The following terms and conditions usually apply:
- The insurance company will pay off your credit card debt up to a maximum amount (usually between $5,000 and $50,000).
- Coverage is usually limited to critical illnesses such as cancer, multiple sclerosis, paralysis, muscular dystrophy and other serious conditions.
- You must not have had a pre-existing condition before you applied for the insurance coverage.
The complete list of injuries or illnesses covered by the insurance and the terms and conditions of coverage will be included in your credit balance insurance contract or certificate.
What does it cost?
Like other forms of insurance, you must pay a monthly fee, called a "premium". This premium varies from issuer to issuer (from $0.29 to $1.49 for each $100 of outstanding balance on your credit card). It is charged directly to your credit card every month. The premium will change each month depending on your outstanding balance: the lower the balance, the lower the premium. If you carry a large balance from month to month on your credit card, the credit balance insurance premiums can quickly add up.
If you are close to the limit on your credit card, you should be very careful - the monthly premium charge for your credit balance insurance could put you over your credit limit! If this happens, your credit card issuer may charge you an "over-the-limit" fee.
How can you make a claim?
If you die, become critically ill, lose your job or have an accident, you or someone acting on your behalf must notify the insurance company right away. The insurance company will then ask you or your representative to complete a "claim" form, usually within 90 days of the death, involuntary job loss or health diagnosis.
Before filing a claim, you or your representative should read the insurance contract or certificate carefully to make sure that all the necessary information to support the claim is avalaible. In most cases, proof of your death, injury, disability or involuntary unemployment must be provided in the form of an autopsy report, or a letter from your doctor or former employer. Although a medical examination is not necessary when you apply for credit balance insurance, an insurance company may request that you undergo a medical exam by a doctor of its choice before it pays out any benefits. Benefits normally begin 30 calendar days after disability or loss of employment.
How can I get - or cancel - credit balance insurance?
You can get credit balance insurance through your credit card issuer when you sign up for a new credit card. If you have an existing credit card, you can ask your credit card issuer to start the insurance coverage at any time.
When coverage starts, there is usually a 30-day "risk-free" trial period, during which time you can cancel the policy and obtain a refund of any premiums you have paid. You may cancel your credit balance insurance at any time by contacting your credit card issuer.
What should I ask about before signing?
Before signing up for credit balance insurance, make sure you understand the cost per $100 of outstanding balance, the age required to qualify for benefits and the maximum amount that the insurance company will pay. Also, ask your credit card issuer (or check your insurance agreement within 30 days of obtaining coverage) to find out:
- what the insurance covers;
- what the conditions are for obtaining benefits;
- what illnesses or disabilities are covered by the insurance;
- whether or not your spouse or the supplementary cardholder is covered;
- when and how benefits are paid; and
- what the maximum period of time is for which benefits are paid.
If you decide that credit balance insurance makes sense for you, contact your credit card issuer using the telephone number provided on the back of your credit card, or use the forms supplied when you apply for the card. Here's hoping you never have to use it.
Bill Knight is the Commissioner of the Financial Consumer Agency of Canada (FCAC), a federal agency created in 2001 to protect and inform consumers. You can reach FCAC at the following coordinates:
Telephone (toll-free): 1.866.461.3222
Web site: www.fcac.gc.ca