Don’t Buy Credit Card Life and Disability Insurance (GP)
March 26, 2008 by Guest.
You would never take out an insurance policy on behalf of your bank and pay its premiums, would you? But that’s exactly what you’re doing when your credit card company convinces you to buy life and disability insurance. The sales pitch plays upon fears of the unknown:
- What if you became ill or disabled and couldn’t make your monthly minimum payments?
- Wouldn’t you want the peace of mind knowing that an insurance policy will make those payments for you so your credit rating remains in good standing?
If you lose your life, your family would not have to make your minimums either. All for a low, percentage-of-your-balance fee.
But what you’re really doing is making sure your creditor gets paid should something happen to you. And only the minimum monthly payments, while the rest of your debt gains interest until you can pay. In case of death, your balance owing will be repaid to your credit card company up to a certain dollar value, depending on your coverage eligibility.
But that’s not the only way your credit card lender benefits. By selling you the policy, it earns a handsome commission from the insurance company as high as 40%.
What’s worse, you could be enrolled without knowing it because of standard policy that automatically adds the insurance to your agreement — you can find it buried in the fine print. And not only for credit card accounts, but also other types of loans and credit lines. To add insult to injury, you may also pay interest on your policy as it’s added to the principal of a loan.
You can still protect yourself with life and disability insurance, just don’t sign up through your bank. You can find life insurance policies that will cover all your debts (not just one credit card or loan) that you can also name a beneficiary.
So next time you sign up for credit — be it a credit card, credit line or other type of loan, read the terms and conditions carefully, and ask your financial institution directly about its life and disability insurance policies so you don’t become a victim of this credit card company secret.
About the Author:
Linda Bustos is an Editor for CreditorWeb, where you can learn about personal finance and credit cards, or apply for a credit card online.
Photo by Classyshot via Flickr
Hi LINDA,
I completely agree with your comments. We already pay credit card companies huge amounts in interest, quite frankly i don’t know how they can justify wanting more in insurance payments by playing on our fears that we may be unable to pay off our debt. For the vast majority of people this is simply like pouring money down the drain.
As much as I see your point, I must respectfully disagree. Yes, they prey on your fears - but what if those fears came true? As someone who watched her father get ill and struggle because of his lack of disability insurance I feel it is a necessary expense to secure the future of your and your family in the event something happens to you. My father lost his house and pretty much everything because he could no longer work. The kicker is, he had disability insurance for years and years - 2 years before he became ill, he discontinued the policy because the premiums became too expensive. So had he continued paying the extra few dollars each month for the insurance, he wouldn’t be forced to live in squalor with so little money that he defaults on even the most minor payments. My advice: Make the expenditure - you never know when that predicament could happen to you.
@Jess — I am sorry to hear about your father. In this case, Linda was referring to life and disability insurance offered by your credit card company to pay off the credit card balance.
I totally agree that you SHOULD have life and disability insurance to cover YOU.