Is Credit Card Insurance a Scam?

The following guest post is from Tisha Tolar.  Tisha is a freelance writer providing content for CreditCardAssist.com, where she regularly writes about credit cards, rewards programs and general consumer finance issues.

Credit cards certainly are not what they used to be. There is so much competition in the industry it seems each company needs to implement a new concept each week to keep account holders happy. When you applied for credit cards back in the day, basically you received a credit limit and a piece of plastic, along with monthly statements. Now, it’s a whole different story.

Too Much At Once

From cash back rewards cards to bonus miles to free airline miles, credit cards have come a long way and not always for the positive. While credit card spending has hit record highs and consumer debt is even higher, credit card responsibility is essential to maintain great credit scores and good money management skills. It becomes all the more difficult to stay on top of your financials when terms keep changing, interest rates keep rising, and more fees and penalties are getting tacked on to your account balance each month.

What’s Up With Insurance?

Adding to the frustrations are the additional programs your credit cards want you to sign up and pay for, such as disability and life insurance. Most people will be offered the insurance option during the application process. If you decline at that time, chances are good that you will be solicited by phone and mail in the near future. The credit card company will likely present the sales pitch that in the event of your death, disability, or serious illness all of your credit card payments will be taken care of. Your family will not have to be concerned with your credit card debts during that tragic time. You can obtain this additional insurance by paying a small percentage of your monthly balance.

The Things You Don’t Need

What the credit card company does not tell you is what really happens should you fall ill or die. In the event of your untimely demise, only your minimum credit card payments are covered by the insurance. Your entire balance is not paid off in a lump sum, which means that finance charges still accumulate on to your balance. The credit card company is essentially selling you a policy that protects them, and not you.

If you have already fallen for the pitch to buy insurance, you will already know that it becomes difficult to cancel the policies. You end up having to deal with the insurance company directly and the credit card company will not be offering you assistance. On some occasions, simply contacting the insurance provider becomes an impossible task. The credit card companies can be particularly forceful and oftentimes customers end up signing up for coverage without adequate knowledge. Companies will also offer free introductory periods that you will find hard to cancel.

Your best bet is to read everything in detail before signing up for anything. Do not be afraid to say no when asked or pushed into a policy. If you are interested in insurance policies that will truly take care of your debts and your loved ones, speak with a qualified insurance agent and find a policy that will work for you and most likely cost you less money.

Comments

  1. Yeah, I agree. Unfortunately, I was paying for this for too long, then I realised that I pay off my bill every single month! Also, if something were to happen to me, I’d still be able to pay off the bill the next month, so in reality, I just didn’t need it at all.

  2. Also, it should be noted, that in the event of your death, you’re rarely bound to the terms of a contract signed while you were living. Apparently the collection agencies haven’t found a way to reach beyond the grave.

    Not that they won’t try to collect from your survivors, they will. But they’re under no obligation to pay. One lawyer told me that he always recommends spouses split the debts down the middle, and make sure they’re not joint accounts.

    That way you’ve just insured yourself for half of your debt balances, for free.

  3. All types of extended warranties are scam, including credit card insurance. They do not cover your balance, only minimum payments and for a short period of time, usually 2-3 years.

  4. Ugh, I get one of these offers at least once a month! Most recently, Chase tried to force me to “upgrade” to their Signature Freedom card. They sent a new card in the mail (despite the fact that my current card doesn’t expire until 2010) with a letter insisting that I had to call and activate it. The difference? An insurance plan got tacked on to the existing card–same interest rate, same cash back rewards program. I declined and shredded the new card.

  5. If you really are worried about absolving your estate of your debts when you die, just get a large enough life insurance policy to take care of everything. I am only 30 but have a million dollar policy for only about $40 per month. It is more than enough to take care of all debts and have plenty left over for my family should the need arise. It is a 30 year fixed rate policy and is simply there to provide my family with peace-of-mind should the unexpected unfortunately happen. (Mind you this rate is for a physically fit, non-drinker, non-smoker who has a good driving record.)

    I will say though that not all extended warranties are scams. Some are worth it, but all are definitely a gamble. The numbers usually fall in favor of the company granting the warranty. They have to, otherwise they wouldn’t be able to offer warranties at all.

  6. Be sure and distinguish between credit life insurance and life insurance that may be endorsed by your credit card company.

    The type of product described above is credit life insurance and is usually way over priced for the protection you get and as the author accurately describes it can be hard to contact the insurance company to make claims or cancel the insurance. Many times it is unclear who the insurer even is.

    Many credit cards and banks endorse life insurance companies through the mail and through their websites. In this instance your credit card company may endorse a certain life insurance company or have a negotiated deal with the insurance company for a special rate or added convenience. In this instance you deal directly with the insurance company and the actual transaction works just like any other life insurance purchase.

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