Life insurance or critical illness insurance attached to a credit card is sold as a way to pay off your outstanding credit card balance, but in the fine print you’ll discover it’s mainly a lucrative money-making scheme for the issuing banks at the expense of policyholders.
A one-stop shop for covering your credit card balance in case of illness or death probably sounds incredibly useful and convenient at first. After all, you probably use your credit card daily, so why not pay to clear your balance, should something happen to you, through the same credit card?
Problem is, credit card life insurance and critical illness insurance policies will never pay off your balance entirely.
A Maximum of Five Per Cent
“They only pay a maximum of five per cent of your balance or the minimum balance, whichever is greater,” says Ellen Roseman, personal finance columnist for The Toronto Star.
To put that in perspective, according to Marketreview.com, the average outstanding credit card balance in Canada (as of November 2015) is $3,745 and five per cent of that is only $187.25.
“That’s very little. You still owe all the rest. All [the banks] are really doing is, by paying something on your credit card, allowing you to keep that credit card without having it discontinued by the credit card issuer because if you don’t make your minimum payment, then you’re really in trouble,” says Roseman.
Credit Card Insurance Can Be Difficult to Spot
Five per cent also isn’t very much when you consider the high cost of the premiums relative to the amount of coverage. When Roseman first started reporting on this issue ten to 15 years ago, the banks would say, you only paid for the coverage if you carried a balance from month to month. If you were one of half of all Canadians who pay off their balance every month, you would receive coverage for free. These days the premiums are calculated based on your average daily balance.
“The banks being as genius as they are and as hungry for profits decided that they wanted to get money for it every single month,” says Roseman.
So if your average daily balance is $372.58 and your insurance rate is $1.10 per $100 of balance, your premium would be $4.09 for that month.
“People really don’t see it as a recurring charge because often, it’s different every month, so they can’t spot it,” says Roseman.
Since it’s so difficult to spot, many people don’t even know they have it. Some people may have unknowingly signed up in the past because it was bundled with some other product, like a loan or a mortgage and they received it when they signed the paperwork. Alternatively, maybe they agreed to it just to get an annoying telemarketer to move on to the next call, but then forgot to cancel it later.
“My son worked for one of these call centres and I was really impressed with the way he was trained because the training was, ‘Plow through any objection!’ They gave them all the different objections people would have and gave them scripts on how to get through the objections,” shares Roseman.
“A lot of the telemarketers will call at times when people are busy and won’t take no for an answer, so people are nice and they say, ‘Okay, let me have it and I’ll get out of it later.’ You can cancel it at any time, but at some point, maybe it was harder to cancel or they didn’t realize you could cancel, so they kept it going a lot longer.”
You Don’t Necessarily Have Coverage
But just because you have credit card insurance, doesn’t mean you qualify for the coverage you’ve been paying for because the insurance companies behind credit card life and critical illness insurance engage in a practice called post-claim underwriting.
“The banks don’t check your medical records until after the claim is made and if there’s any discrepancy at all, the customer loses the policy. All they sometimes get is their premiums refunded and often, even that is a fight,” explains Roseman.
With so many issues around credit card balance insurance, is there ever a rare circumstance when it would be appropriate to get?
“If you have a terrible emergency, you lose your job, you lose your house — I don’t know what the emergency would be. But, usually you go through your credit cards first because often you do have a generous credit line on your credit cards and you’ve gotten it during the good times, so you rack up an amazing amount of debt on your credit card,” says Roseman.
“Maybe this credit card balance insurance might help you, but first of all, it has to be the right kind of emergency to fit into the guidelines. Plus, you still only get a little of your balance paid off, so you or your estate would have to find a way to pay off that balance or go bankrupt, as probably many people do.”
Alternatives to Credit Card Balance Insurance
Instead of buying a product that feeds into your desperation to pay off your credit card debt, try looking for alternatives through traditional individual or group life insurance or critical illness policies.
“Many people have life insurance policies through their employer if they have a full-time job, so check and see how much the life insurance policy is with the employer. Then, they can supplement it if they want,” says Roseman.
“I often recommend buying term insurance through a university association or other group plan. If you have home equity and you need extra money, you can borrow against your home equity. You can always buy a separate critical illness policy and that will give you a lump sum for anything at all. It’s quite unrestricted as long as you meet the diagnosis requirements for a critical illness which differ from company to company.”
In Roseman’s experience, many of her readers see critical illness as a serious illness you’ll never recover from, but that’s not always the case. Plus, you can often find both life and critical illness policies that offer cheaper premiums and more coverage than anything credit card balance insurance can offer.
“If you have a $1,000 balance owing, it’s $114 a year, so that really adds up. Over ten years, you’ve paid over $1,000. If you have a $2,500 balance owing, which a lot of people do, especially if they’re looking for the rewards, that’s $285 a year, which means almost $3,000 over ten years and if they’re only going to pay you a few thousand per claim, that’s not very good,” she says.
Whatever you decide, be sure to work with a qualified insurance broker who can walk you through the fine print and different variations present in individual life insurance and critical illness insurance policies.
“It’s always important to read the policy and ask questions of whoever is selling it to you,” says Roseman.
More Resources
For more information on credit card balance insurance visit the Financial Consumer Agency of Canada and type “Credit Card Balance Insurance” into the search box.
To read more coverage of the credit card balance insurance issue written by Ellen Roseman, see the following articles:
Dec. 12, 2014, We get TD to reverse insurance denial: Roseman
Oct. 20, 2013, Banks’ sales pitches can cost you money: Roseman
Don’t buy insurance from banks, April 1, 2009
If you want our help setting you up with an individual or group critical illness or life insurance policy call us at 1-866-899-4849. You can also visit our Life Insurance, Critical Illness and Group Benefits Quote Pages.
