What Is Balance Protection Insurance?

Credit card companies always seem to be offering credit card balance protection insurance. The salesman on the phone paints this terrible picture of what will happen if you get sick and can't pay your credit card bill. Then he tells you the insurance only costs a few pennies a month, and you can even try it out for free for the first 30 days. Consumers need to make an informed decision before signing up for this coverage.

Definition

In theory, like all insurance, credit card protection insurance collects a small fee regularly in order to protect you from a large unexpected expense at a later date. In this case the fee is based on the amount of your outstanding balance, and it protects you against unforeseen circumstances that might prevent you from being able to make payments on your credit card balance.

Types of Credit Card Payment Protection

There are basically four types of credit card protection. The first three types will pay your minimum monthly payment for a certain length of time should you qualify based on the policy's criteria. To qualify, you must have become disabled, lost your job involuntarily or suffered a critical illness. If you are unable to work, the insurance will pay your minimum payment. The fourth type is slightly different in that it pays your entire balance (not just the minimum) if you die or are permanently dismembered.

How Much Does it Cost?

At first blush the fees seem reasonable; after all, they are only a few cents a month. Typically, they range from 87 cents to 95 cents per $100 of balance on your card as of 2011. If you have no balance, you don't pay anything. But if you have no balance, you wouldn't need the insurance.

Is It Worth the Cost?

Assuming the lowest fee of 87 cents per $100 of balance and a monthly balance of $6,000, it would cost you $52.20 a month for the coverage. So if you have the coverage for a year and then get laid off, you will have paid $626.40 for insurance. But even if you collect, it doesn't pay off the whole $6,000; it only pays your minimum until you can start making payments again. If you had put that money into a savings account, you could have used it to make your minimum payments for quite a while. Or if you had put it toward your debt your $6,000 balance would be down to $5,373.60; either way, balance protection insurance is an expensive form of insurance.