In our fast-paced world, credit cards are handy tools offering convenience and power. But they also bring risks, leaving many people vulnerable to money problems.
Just like you insure your life, mortgage, belongings, and car, you can insure your credit cards too. Many Canadians wonder if it’s a smart move or just a way for banks to make more money.
This article explains credit card insurance – what it is, how it works, costs, and other alternatives to consider. By the end, you’ll have a clearer picture of whether credit card insurance is right for you. So, let’s break it down and make it simple.
What Is Credit Card Insurance?
Credit card insurance, sometimes called balance protection insurance or balance insurance, is a type of coverage designed to assist you in paying off your outstanding credit card balance, subject to certain policy limits. This insurance steps in to cover your monthly credit card premiums if your ability to earn income is disrupted due to specific unexpected events.
Imagine situations like being unable to make your monthly payment because of an injury, job loss, terminal illness, hospitalisation, legal strike or walkout, or even in the unfortunate event of your passing. In such cases, credit card balance protection insurance covers your minimum monthly credit card payments or settles your outstanding balance, depending on the circumstances.
Repaying debts can be challenging, especially when unforeseen financial hurdles arise. That’s where balance protection insurance becomes your financial safety net, ensuring you don’t fall behind on your payments.
It’s worth noting that your credit card issuer may offer you credit card insurance during the credit card application process, when you activate your card, or when you make changes to your credit card account. However, it’s crucial to understand that credit card balance insurance is an optional add-on product separate from your credit card.
How Does Balance Protection Insurance Work?
If you’re among the 30% of Canadians who carry a balance on their credit cards and part of the one-third without enough emergency savings to cover at least three months of expenses, you might face challenges paying off your credit card debt when unexpected financial disruptions occur.
Falling behind on your monthly credit card payments harms your credit score and can hinder your ability to qualify for future credit. To avoid these pitfalls, you can enrol in credit card insurance your credit card issuer provides.
You pay a monthly premium to your credit card company for this coverage. In return, they step in to assist when life takes an unexpected turn. If you become injured, disabled, hospitalised, or lose your job, they will pay a percentage of your outstanding credit card balance, typically ranging from 10% to 20%, up to a predetermined minimum amount. However, in the unfortunate event of your passing, they would cover your entire balance up to a maximum limit.
Credit card insurance offers a safety net to help you manage your credit card debt when unforeseen circumstances arise, safeguarding your financial well-being and creditworthiness.
Benefits of Credit Card Insurance
Facing job loss, injury, or disability can be incredibly challenging, and the last thing you want to worry about is making monthly payments. This is where credit card balance protection steps in, easing the burden by covering a percentage of your outstanding balance.
In the event of unexpected circumstances like job loss, critical illness, disability, or even the loss of a loved one, your credit card insurance becomes a dependable lifeline. It ensures that your monthly payments continue, offering much-needed financial support during difficult times.
Moreover, credit card insurance serves as a guardian for your credit score. When you cannot work for any reason, your credit card issuer steps in to make at least the minimum payments on your behalf.
This proactive approach prevents any negative impact on your credit history, ensuring your financial reputation remains intact until you can resume making payments independently. In essence, credit card insurance acts as a safety net for your finances and creditworthiness.
Downsides of Credit Card Insurance
Credit card insurance is a useful safety net, but it’s crucial to understand its limitations. It doesn’t provide coverage for every injury, illness, or instance of involuntary unemployment. If you had symptoms of a disease before getting credit card insurance or if your pre-existing condition worsens, your insurance claim could be denied, leaving you without any financial support.
Moreover, if you left your job voluntarily, were terminated with cause, or worked on a contract basis, you won’t be eligible for credit card insurance benefits.
Additionally, it’s important to note that balance protection insurance only covers the outstanding balance on your card before the income-loss event occurs. It covers only a portion of your balance, not the entire amount. This means you could still be left with a substantial debt to repay.
Furthermore, the cost of credit card insurance can add up. Premiums are calculated based on your average daily balance, typically around $1 for every $100 you spend on your card. These premiums fluctuate monthly, making credit card balance insurance an expensive option to consider. It’s essential to weigh these downsides against the benefits when deciding if credit card insurance is right for you.
How Much Does Credit Card Insurance Cost in Canada?
Similar to the interest fees on your credit card, the cost of credit card insurance is determined using the Average Daily Balance Method. This method involves adding up all the daily balances on your credit card for the entire month. You then divide this total by the number of days in the month and multiply it by the premium percentage rate. Typically, this premium falls in the range of 0.8% to 1.20% of your average daily balance.
However, it’s important to note that the expense of credit card insurance is not fixed; it fluctuates based on your balance. The higher your balance, the more you’ll be required to pay for credit card insurance. In essence, your cost rises or falls in direct proportion to your balance, making it crucial to consider this factor when evaluating the value of credit card insurance.
Is Balance Protection Insurance Worth It?
If you’ve already secured term life insurance, disability insurance, critical illness insurance, and stashed away some rainy-day funds, the question of whether to apply for balance protection insurance on your credit cards might not be on your radar.
The need for credit card insurance may not arise if you’re in a position to pay off your credit card balance in full each month. It’s important to note that credit card insurance is entirely optional, sold as a separate product.
So, if you typically maintain a small daily balance, have substantial savings, or possess robust life and disability insurance coverage, the odds are you won’t require credit card balance protection insurance.
However, if these conditions don’t apply to you, it’s worth considering signing up for credit card insurance. Importantly, remember that enrolling in balance protection is not a prerequisite for credit card approval. It’s a choice you can make based on your individual financial circumstances and needs.
Alternatives to Credit Card Insurance
Many individuals opt for credit card balance insurance to safeguard themselves and their loved ones. In the unfortunate event of your passing, your family can rely on the death benefit from your life insurance to settle your debts, including outstanding credit card balances.
If you need more coverage to address your credit card debt, there’s a cost-effective alternative: increasing your life insurance coverage. This approach proves more economical than obtaining separate balance protection insurance coverage.
When unemployment strikes, it’s vital to note that your balance protection won’t directly clear your credit card balance. Your credit card issuer will either defer your payment or cover only the minimum monthly amount due. Therefore, instead of shelling out hefty monthly premiums for credit card insurance, channelling your funds into a savings account for emergencies may be wiser.
Moreover, critical illness and disability insurance offer more comprehensive coverage. These insurance products can step in to replace your income if you fall ill or become injured, and they often provide the means to settle your debts entirely. When considering financial security, these options might be more fitting alternatives to credit card insurance.
Final Thoughts on Credit Card Insurance
With credit card insurance in place, you can alleviate the worry and know that your coverage will make monthly payments to your credit card issuer. However, it’s essential to make informed decisions about your financial security. Is credit card insurance the best option for you, or are there more cost-effective and comprehensive alternatives available?
By evaluating your financial situation and exploring alternative insurance products like life insurance, critical illness, and disability insurance, you can make a proactive choice that not only safeguards your credit but also provides broader protection for you and your loved ones.
FAQs on Balance Protection Insurance
What does balance insurance mean?
Balance protection is a type of insurance coverage credit card companies in Canada offer to credit card users, which promises to pay off the minimum monthly payment associated with the credit card’s outstanding debt balance. This protection applies only to cardholders who cannot make monthly payments due to specified circumstances, such as illness or sudden unemployment.
How do I cancel my balance protection insurance?
You can cancel your balance protection insurance anytime by contacting the insurance company. The insurance company is often different from your credit card issuer.
