A credit protection program is an optional insurance feature that certain lenders provide to cover loan payments on behalf of borrowers under certain circumstances, such as when they become ill, lose their jobs or become deceased. The cost of the insurance is usually a small percentage of the amount borrowed. In the Federal Deposit Insurance Corporation's, FDIC, view while certain classes of individuals may benefit from credit protection programs, other forms of insurance may be better for most consumers.
Qualifying Event
While each lender designs their own program according to their specifications, credit protection programs usually cover events such as involuntary job loss, certain disabilities and/or accidental death. Other events may be covered as well. For example, under Chase Bank's Payment Protector Plan, if a credit cardholder is called to military reserve or guard duty, gets married, has or adopts a child or incurs a business hardship, relief under the plan may be available.
Plan Benefits
If a qualifying event occurs and the borrower has purchased the creditor's protection plan then under most plans the monthly payments, interest and associated fees are waived. It should be noted that the insurance does not cancel any of the borrower's debt.
Cost of Insurance
The cost of insurance varies by provider but generally amounts to a small percentage of the amount borrowed. For example, under the State Farm Bank Credit Card Protection program, the insurance costs $0.74 per $100 of the cardholder's monthly balance. Chase's Payment Protection Plan costs $0.89 per $100 of the monthly balance, as of 2010.
Suitable Consumers
According to the FDIC, credit protection programs are likely only suitable for individuals that are older, who are ill or who are otherwise concerned about potentially losing their jobs.
FDIC Recommendation
The FDIC concludes that other forms of insurance may be more cost effective for most individuals and may yield higher returns. The federal agency considers a debt of $4,000, where consumers would likely pay anywhere from $150 to $350 a year under a credit protection program, as of 2010. The FDIC finds that consumers would likely be able to purchase a larger term life insurance policy or simply add to their emergency savings which could be used to pay off any obligation, not only credit card debt.
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