Consider This Before You Sign Up for Credit Card Insurance

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:

Credit Card Insurance

As you can see from my example, you would spend nearly $300 in credit card insurance premiums. Remember, this amount is charged per $100—so 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.

5 thoughts on “Consider This Before You Sign Up for Credit Card Insurance”

  1. I don't understand why you set different payment amounts for the two different types of cards. I would think this invalidates the comparison.

  2. Bobby,

    It's the same payment amount of $125 per month. It's just that $25 of the $125 payment is going to pay for the insurance premium, while the ENTIRE $125 is being applied to the other card's balance.

  3. Interesting comparison. I love telling the salespeople that I don't need their product because I don't carry a balance and I have an emergency fund 🙂

    I've always wondered though how much the company would actually pay out. If they're only making the minimum payment, then I don't see how that's going to help. Wouldn't people be better off putting the premium amount into an emergency fund?

  4. Beth,

    I used to work for a credit card company (about 10 years ago) and at that time if the insurance was still making payments after about a year they would payoff the balance. During the time the insurance is paying, they aren't adding the premium to the card balance. I have no idea if it still works that way or not.


    I see where you are coming from now.

  5. Thanks for the numbers breakdown. Not surprisingly, credit card add-ons rarely make sense, but hell, if you’re considering credit card insurance (fearing job loss or what have you) in the first place you might want to check into debt settlement with your credit card company. You can get your credit card balance reduced. It’s not for everyone, but if you’re stuck, it’s an alternative to bankruptcy (or credit card insurance).

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