There is a form of insurance for everything. Just as you can buy insurance on your life, mortgage, belongings, and car, you can also purchase insurance for your credit cards.
Given the world we live in, your source of income can be interrupted for any reason at any time, and not everyone can afford or qualifies for life or critical illness insurance that can cover your credit card balance when injured, ill, or should they pass away. That’s why you need credit card insurance.
Credit card insurance helps pay off your outstanding credit card balance if you lose your job, are hospitalized, become critically ill, are disabled or injured, are involved in a legal strike or walk out, or should you pass away.
Many Canadians wonder if credit card insurance is worth it or just another way for Canadian banks to line their coffers. This article covers what credit card insurance is, how it works, its cost, and other alternatives you might want to consider.
Without skipping a bit, let’s get into it.
What Is Credit Card Insurance?
Credit card insurance, also called balance protection insurance or balance insurance, is insurance coverage that helps pay your outstanding credit card balance (subject to any limits in your policy). It pays your monthly premiums on your behalf to your credit card company if your income is interrupted by one of the several specified unforeseen circumstances.
Suppose you cannot make your monthly payment because of an injury, job loss, terminal illness, hospitalization, legal strike or walkout, or death. In that case, credit card balance protection insurance covers your monthly minimum credit card payments or pays your balance in the event of your death.
Repaying your debts can be challenging, especially when you hit a financial roadblock. Balance protection insurance comes to your rescue as your’ knight in shining armor’ when you can’t meet up with your payments.
Your credit card issuer might offer you credit card insurance when you apply for a credit card, activate your card, or make any changes to your credit card. Credit card balance insurance is optional and is a separate product from your credit card.
How Does Balance Protection Insurance Work?
Suppose you are like 30% of Canadians who carry a credit card balance, and also part of the one-third who don’t have emergency funds that can cover at least three months of expenses. In that case, you would have difficulties paying off your credit card balance if something unexpected interrupts your cash flow.
Defaulting on your monthly credit card payments can damage your credit score and be detrimental to your ability to qualify for future credit. To avoid this, you can sign up for credit card insurance from your credit card issuer.
You pay monthly premiums to your credit card company for the coverage, and they would pay off a percentage of your credit card balance if you are injured, disabled, hospitalized, or lost your job.
If you are injured, disabled, or lose your job, they will pay a percentage of your balance, usually 10% to 20%, up to a set minimum. They pay your balance in full to a maximum amount if you die.
Benefits of Credit Card Insurance
Facing job loss, injury, or disability can be challenging, and making monthly payments can be the least of your worries. Credit card balance protection reduces the burden of making payments to your credit card issuer by helping you pay a percentage of your balance.
Should your income be interrupted by unforeseen circumstances like job loss, critical illness, disability, or dear, you can count on your credit card insurance coverage to make your monthly payments.
Having credit card insurance also protects your credit score. When you can’t work for any reason, your credit card issuer will make at least the minimum payments on your behalf until you can pay it yourself so you won’t tarnish your credit history.
Downsides of Credit Card Insurance
Credit card insurance doesn’t cover all injuries, illnesses, or episodes of involuntary unemployment. Suppose you had disease symptoms before applying for credit card insurance, or your pre-existing condition worsens. In that case, your credit card insurance claim may be denied, and you will not receive any payments.
Also, if you resigned from your job, were terminated with cause, or were in a contract position, you will not be entitled to any credit card insurance benefit.
Further, balance protection insurance only covers the outstanding balance before your income-loss event. It only covers a percentage of your balance and not all of your balance, which means you might still have a large debt to pay off.
Credit card insurance premiums are based on your average daily balance, around $1 for every $100 you spend on your card, so your premiums change monthly. It is safe to say that credit card balance insurance is expensive.
How Much Does Credit Card Insurance Cost in Canada?
Like your credit card’s interest fees, the amount you pay for credit card insurance is calculated using the Average Daily Balance Method.
This method adds up all your credit card’s daily balances for the month, divides the total by the number of days in the month, and multiplies it by the premium (percentage rate). Generally, your premium is between 0.8% to 1.20% of your average daily balance.
However, the amount you pay for credit card insurance isn’t fixed; your cost will rise or fall depending on your balance. The higher your balance, the higher you will pay for credit card insurance.
Is Credit Card Insurance Worth It?
Suppose you already have enough term life insurance and disability insurance, critical illness insurance, and some rainy-day funds. In that case, you may not need to apply for balance protection insurance on your credit cards.
You may not need credit card insurance if you have enough funds to pay off your credit card balance in full each month. Remember that credit card insurance is optional, and the coverage is sold as a separate product.
So, if you usually have a small daily balance, already have ample savings, or have significant life and disability insurance, you would not require credit card balance protection insurance.
However, if you don’t, you should look into signing up for credit card insurance. But keep in mind that you don’t have to sign up for balance protection as a condition to receive approval for credit cards.
Alternatives to Credit Card Insurance
Many people apply for balance insurance to protect themselves and their families. If you die, your family can use your life insurance death benefit to pay off your debts, including your credit card balances.
You can increase your life insurance coverage if you need more coverage to cover your credit card debt. It is more affordable to do so than to get separate balance protection insurance coverage.
If you become unemployed, your balance protection won’t pay off your credit card balance. Your credit card issuer usually defers your payment or pays the minimum monthly payment due. So it would be better to set aside funds into your savings account for emergency funds than pay exorbitant monthly premiums for credit card insurance.
Also, critical illness and disability insurance are more robust insurance products and would better replace your income if you become ill or injured, and you can even pay off your debts in full.
Final Thoughts on Credit Card Insurance
With credit card insurance in place, you can alleviate the worry and have peace of mind knowing that your coverage would make monthly payments to your credit card issuer. You can continue to protect your good credit rating if your income is reduced or interrupted by unplanned circumstances.
FAQs on Credit Card 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.
Hi, I'm Adeola Adegoke. I am a licensed Insurance Broker in Manitoba, and I hold a master’s degree in Mathematical Sciences (with a major in Financial Modeling) from the African Institute for Mathematical Sciences (AIMS), Tanzania.
Also, I have a second master's degree in Statistics from the University of Regina, and I am currently pursuing my Ph.D. in Statistics at the University of Manitoba.
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