Credit card insurance and whether consumers need it is probably the most common question we see hit our in boxes. Are these insurance policies were the expense and do they really serve their purpose when the time comes to put them to the test? There aren’t any easy answers, but most agree these policies are more likely a waste of money. Take a look –
Many consumers began rethinking their safety nets in late 2008 when the writing on the wall became clear and we headed into a recession. People were doing everything they could afford to put protective mechanisms in place and for millions, that included tacking on credit card insurance. The mindset was that if they lost their jobs, they at least didn’t have to worry about making their credit card payments.
Even if the consumers weren’t seek out these offers, the companies were coming to them. They were selling convincing stories, including being told their balances would be covered up to tens of thousands of dollars in the event of a lost job. Some companies guaranteed $10,000 while others upped the offer with promises to make payments on cards that carried up to $50,000 in debt. For these consumers, it was simple: cover my bases when I can’t. The last thing they were thinking about were massive restrictions.
Soon after adding credit insurance to her credit card accounts, one woman said her husband lost his job as a construction worker. She then called the company to get the ball rolling so that her credit would be protected. It was only then she was told the policy didn’t include construction workers. Efforts to get the $3,000 reimbursed to her fell on deaf ears, too. Now, she’s gone into debt counseling and is paying offer debt slowly; her credit is ruined.
The woman, who lives in Tulsa, said,
I’m having to borrow money from people to put gas in my car and buy stuff to make sandwiches with. I don’t have any money to live on.
Clearly, this was total failure and the diligence in doing her best to avoid financial ruin meant little to the insurance company.
Consumer analysts say problems like these are all too common. A recent investigation by the Government reveals the plans are expensive and difficult to understand. Worse, the investigation sows that consumers with this type of protection on their credit cards will see about twenty one cents in “tangible” financial benefits. As a result, several agencies came together to provide education for consumers. In the report, notes are made that these products are not good for consumers. Plus, it says even in the best circumstances, these policies only cover the minimum payments due, which means the interest would accumulate faster on the unpaid balances.
The report also outlines tips for consumers, too. The biggest advice? It says to avoid these types of policies in their entirety.
They cost money in direct upfront payments, and even when they do pay out, they cost extra money in deferred interest payments.
The loopholes are numerous, the terms and conditions are convoluted and confusing and because of that, many consumers never see any kind of payouts – even when it appears they’re in situations that were the incentive for getting the policies in the first place.
It’s poor coverage for the most part, and most people would be better off saving that money,
said one consumer advocate.
For those who believe it’s a necessary addition, you should comparison shop, carefully review the terms and conditions and go into it understanding it might not be or do what you think it will. If you have high credit card debt and lose your job or are part of some other event that changes your income levels, remember too that only the minimum payments will be made and there are limitations on how long those payments are made for you. Also, be sure you understand what kind of events qualify. For instance, does the policy pay if you have medical emergencies? Job loss? Death?
Finally, consumers are warned that they can sometimes pay more for the insurance than what their balances on their credit card accounts are. You may not use the policy for five or six years and it could be you pay $5,000 or more to ensure payments would be made on a credit card that only has $1,000 balance. Do the math and really think about the payout.
As a side note, the CFPB has expressed interest in investigating these companies and possibly issuing new compliance dynamics for the way they conduct business. Much of that will depend on what ultimately happens at the polls this week and who becomes the next president of the United States.
Do you have any of these policies in place? If so, have you had the occasion to put them to the test? Share your experience with us.