Credit card balance protection insurance is designed to help cover your minimum payments if you face unexpected life events like disability, job loss, critical illness, or even death. While it may sound like a good safety net, many financial experts argue that it’s not worth the cost. In fact, if you already have an independent insurance policy, you’re likely covered more comprehensively and with fewer restrictions.
High Premiums, Low Payouts
“Buyer beware” is a phrase that definitely applies to credit card balance protection insurance. Trevor Van Nest, a certified financial planner and money coach with York Region Money Coaches, warns that these plans often come with numerous fine-print exclusions, high premiums, and limited payouts. “Banks make a lot of money selling this insurance, but you don’t hear about many claims being paid out,” he explains.
The specifics of these insurance plans vary by provider, but they generally cover a small portion of your balance or minimum payments, as long as you meet the qualifications. For instance, TD Bank offers monthly benefit payments of 5% or 10% of your credit card balance, with a maximum payout of $25,000. The cost? About 99 cents per $100 of your daily average card balance, or 59 cents for those 66 and older.
Van Nest points out that if you have a $3,000 balance, you could end up paying almost $400 annually for coverage that might only pay $90 per month. This means you’d need to claim benefits for at least four months just to break even for a single year of premiums. Over multiple years, the breakeven point becomes even more distant. His advice? “It’s usually better to find a cheaper alternative and invest the difference.”
You’re Paying, Even Without a Balance
You might think that if you pay off your credit card balance every month, you’d avoid paying for balance protection insurance. Unfortunately, that’s not always the case. Banks often calculate the premium based on your average daily balance—which means even if you owe money only for part of the month, you could still be charged for insurance.
For example, if you pay your card off in full each month but had an outstanding balance for even a few days, your premium is calculated based on the average amount you owed daily. Van Nest suggests paying off your balance before the statement date to avoid this fee.
The Coverage Might Not Protect You
One of the biggest issues with credit card balance protection insurance is that the coverage isn’t always straightforward. Van Nest cautions that there are many exclusions in these policies. For instance, if you pass away due to suicide within the first six months, your family may not receive a payout.
In fact, the definitions of qualifying events can be murky. A heart attack might not always count, depending on how the policy defines it. Even something as simple as “losing your job” might not qualify you for benefits if you’re still working part-time. For some plans, working fewer than 25 hours per week disqualifies you from claiming insurance.
One particularly concerning issue is post-claim underwriting—where you’re only assessed for eligibility after making a claim. This means you could pay for years, only to find out you don’t qualify for benefits when you need them most. “There’s nothing worse than thinking you’ll be covered, only to find out you’re not,” Van Nest says.
Consider Other Options
Instead of relying on balance protection insurance, Van Nest advises opting for a separate disability or life insurance policy. These independent plans offer more clarity on what’s covered and when, ensuring you’re not left in the dark if a claim arises.
“It’s always better to get a separate plan, where you’re working with a financial professional to ensure you have the coverage you need,” Van Nest suggests. This way, you can be confident that your insurance will kick in when you need it most, without the hidden exclusions and fine print often found in balance protection insurance.
In summary, while credit card balance protection insurance might seem like a convenient safeguard, it often falls short in practice. You’re likely better off securing independent coverage that offers clearer terms and potentially more value for your money.
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