What is credit card insurance?
Much like mortgage protection insurance, credit card insurance is an insurance policy designed to pay a certain amount off your monthly credit card statement if you lose your job, are unable to work due to disability, or die. It is usually offered to you by insurance providers through the card lender when you apply for a new credit card.
There are three main types of coverage available through credit card insurance:
- Credit card life insurance: Pays off the full balance you owe on your credit card (up to a certain amount) when you die or become permanently disabled.
- Credit card disability insurance: Pays the minimum due payment (usually 2% to 3% of your balance) for a certain time if you become temporarily disabled. This cover usually only applies to purchases you make before you become disabled, so it is not a free pass to continue racking up debt on your card.
- Credit card involuntary unemployment insurance will cover the minimum payment (usually 2% to 3% of your balance) if a cardholder is laid off for a specific period of time. Charges incurred after the layoff are excluded, and if you’re fired due to serious misconduct , you’re not covered.
Sounds too good to be true? That’s because it sometimes is.
Credit card insurance is different to the two forms of insurance that may come at no extra cost as part of your standard credit card:
- Price protection insurance: A Guaranteed Pricing Scheme that covers you for the difference between the price you paid for an item and a lower sale price. This cover usually only applies where the lower sale price is available at a store within a certain distance of the store you bought the item at. Read more about it here.
- Purchase protection insurance: Covers new products you buy with your credit card against loss, theft, or accidental damage. This cover usually applies for up to 6 months from the time of purchase. Read more about it here.
What does credit card insurance cost?
The premium for credit card insurance is charged as a small percentage of the closing balance on your monthly statement. Some providers charge as little as 45 cents per $100 of card balance, while others charge 79 cents per $100 of card balance.
If you revolve a debt on your card, this cost can become quite significant. For example, 0.45% of the closing balance isn’t a large cost but if you are revolving a debt constantly you will be paying 0.45% on the same balance every month compounding so it would add an extra 5.4% to your interest rate effectively.
It’s worth noting that you can avoid the premium by paying the balance in full before the statement is issued. This will mean that you have fewer interest free days but get the benefits of the insurance without paying a premium.
Do you need credit card insurance?
Ultimately it’s up to you, but some things to consider when weighing up your options include:
1. Credit card insurance is not free
Credit card insurance can be a highly expensive form of insurance, depending on how much you owe on your credit card. The premium for credit card insurance is charged as a small percentage of the closing balance on your monthly statement.
2. It may only cover the minimum payment due
Credit card insurance generally only covers the minimum payment unless you die or become permanently disabled. This is only 2% to 3% of your balance, depending on the credit card provider. Some credit card insurance policies cover more though – as an example – Nab covers 20% per month for up to 5 months for involuntary unemployment which is actually really good, and would pay off about 65% of the card over 5 months if the interest rate was 20%.
The benefit will always make the minimum payments which should cover interest and fees, so no-one should really be worse off by claiming.
3. Exclusions apply, so you may not actually be covered
Exclusions apply, meaning that you won’t always be covered if you lose your job, if you become disabled, or even if you die. Only certain types of unemployment, disability, and death will be covered.
For example, you are not covered for disability if your disability is caused by or related to a sickness or injury that required medical treatment within the past 12 months before you began your card insurance policy.
As another example, seasonal workers or contractors will not be covered for involuntary unemployment when their contract ends, even if they cannot find another job right away. You are also usually not covered if you lose your job within 60 days of beginning the card insurance policy.
Also, age restriction exclusions may apply so that you have to be under a certain age to qualify for cover. Even NAB, one of the Big Four major banks in Australia, has an age restriction that you must be under 65 years old when you apply for the insurance policy (current at the time of writing), and you are not even guaranteed to be able to renew the policy each year once you reach 65 years old.
4. Benefit limits apply, so you may not be fully covered
Benefit limits apply, so even if you die or become permanently disabled, the cover that should “pay off your full credit card balance” may only cover you to pay off $25,000 of your credit card balance.
5. Waiting periods and an excess may apply
A waiting period or excess will also usually apply, which would mean that if you are temporarily disabled or you find another job right away, you would not be covered.
The one benefit of credit card insurance, in fact, is that it will pay off your balance when you die, so that your spouse or children (or your estate) does not have to repay your card for you. This means that there is one group of Australians who would benefit from having credit card insurance – those who have pre-existing medical conditions that mean they are not eligible for life insurance. Life insurance would pay off your credit card when you die or become disabled, but if you have pre-existing conditions that are excluded, then you will not be eligible for cover. In contrast, credit card insurance is ridiculously easy to sign up for and they do not exclude as many pre-existing conditions.
Need help saving money?
Do you worry about how you would repay your credit card debt and pay for your usual expenses if something happened?
Everyone should have an emergency savings fund to cover a few months’ worth of credit card repayments, rent or mortgage repayments, and groceries, until you find another job or receive a payout to get back on your feet. How much do you need in emergency savings? We talk about that here.
If you currently spend most of what you earn and don’t have much saved, you can learn how to budget and save for the future. By controlling your spending, you can ensure that it is at a level that you could repay using emergency savings if you needed to:
Consider life insurance
If you’re still worried about how you would repay your credit card if something happened, consider life insurance. You can get cover for a lump sum that would be able to help you pay this with the various cover available under the life insurance umbrella:
- Term Life Insurance covers a lump sum when you die
- Total and Permanent Disability Insurance covers a lump sum if you become disabled
- Trauma Insurance covers a lump sum if you suffer a serious illness or medical event such as a heart attack
- Income Protection Insurance covers a monthly amount if you are unable to work due to serious illness or injury
Learn more about Credit Cards