I read a short article about credit card insurance in today’s Wall Street Journal and thought it would be fun to run some numbers to find out how much such a program would cost.
For those of you who aren’t familiar, credit card insurance is an insurance that supposedly makes your credit card payments in the event that you can’t make the payments. I have never seen or read an actual agreement for this type of insurance but I am certain that there are lots of catches and exceptions involved with this kind of insurance.
That said, let’s assume that you actually purchased such insurance. How much will this insurance cost you? To run an illustration such as this, we’ll need to assume the following:
• Beginning balance of $5,000
• Credit card insurance is $.49 per $100 of the outstanding monthly balance (around $25 for the first month). Some companies charge more and some companies charge less.
• Monthly payment of $100 applied to the card with the insurance and $125 for the card without insurance.
• No additional purchases are made.
• Annual interest rate is 13.99%
I ran an illustration using Excel and this is what I found:
As you can see from my example, you would spend nearly $300 in credit card insurance premiums. Remember, this amount is charged per $100so it declines as the balance declines. In my opinion, you are better off taking the credit card insurance premiums and putting them towards paying down your debt. Yes, it is an insurance product, which could be useful if you lost your job. But, as I mentioned earlier, these plans can be full of loopholes and exceptions. You may not be getting what you think you are paying for. My guess is that the $25 per month they charge you in premiums is pure profit for the credit card company. If it wasn’t, they wouldn’t be calling us every other day trying to enroll us in such a program.