Do I need Credit Card Insurance?

Every so often I get a call from my credit card company offering credit card insurance. The purpose of insurance to protect against job loss, critical illness and disability.

So, what is my answer to these offers? For me, it is always a no and there is a reason I always decline credit card insurance. First, I always pay my balance in full every month. Second, I make sure I have enough in my bank account to cover my credit card spending, so if something were to happen I have the buffer to pay my credit card bills. Third, the cost of insurance is not worth it.

I think there is sometimes a misconception about credit card insurance that it will pay off your debt. That is just not true. The insurance will only make minimum payments. So, while your insurance is making minimum payments you are still getting charged for the interest which means eventually you will pay off the debt from your own pocket. I am sure you have read somewhere on your credit card statement how long it would take to pay off your debt making minimum payments. Depending on the debt it could be decades, so realistically insurance is only making sure you don’t miss your minimum payments while you sort out your situation.

This may seem like a good deal to protect against default on your debt, however, you should consider the cost of this benefit. So, TD, for example, offers credit card balance protection on per $100 for $0.99 plus tax. While a dollar per $100 may not seem much it does add up if you are a heavy credit card user. You have to pay insurance premium even if you pay off your statement in full because the premium is calculated on a daily basis. On any given day, if you owe more than $100 on your credit card you will get charged insurance premium.

The major downside of credit card insurance is that you have to pay premiums plus the interest during the period your insurance is making minimum payments. Before you make the decision to purchase this type of insurance, consider how much of a burden it would be for you to make minimum payments in the event of job loss, critical illness, or disability. Build an emergency fund for these situations and avoid paying premiums that at the end of the day are probably not providing enough of a benefit to outweigh the costs.

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