What is credit card balance protection insurance and how does it work?

What is balance protection?

Balance protection is a type of credit card insurance, often called payment protection insurance. Balance protection is also known as credit card balance insurance.

Balance protection coverage begins when the cardholder cannot make payments because of illness, job loss, or other circumstances explicitly described in the contract. Although the precise terms vary depending on the credit card, balance protection typically covers only the card’s outstanding debt’s minimum monthly payments.

How balance protection works

Balance protection is a type of coverage sold to credit card clients by their lender. Balance protection insurance aims to protect its policyholders from the risk of not paying their minimum monthly payments due to specific circumstances.

Balance protection offers coverage that may help settle your outstanding credit card balance for various reasons like losing your job, being involved in a strike, being hospitalized, a major injury, becoming disabled, becoming critically ill, or dying.

Credit card companies and banks offer balance protection to cardholders for a fee and cover monthly payments for these specific circumstances. Significantly, these circumstances are limited in nature. Triggering events must also be explicitly stated in the insurance contract, with critical illness or sudden job loss usually the most common examples.

What balance protection covers

It is important to remember that balance protection is a type of insurance offered to credit card users, which promises to pay off ONLY the minimum monthly payment associated with the card’s outstanding debt balance. Balance protection can protect cardholders from defaulting on their credit card debt, but it does not prevent or stop the debt from growing.

In this sense, you can look at balance protection as coverage against the risk of defaulting on your credit card payments and the corresponding negative impact on your credit score. The cost of credit card balance protection changes from card to card. For example, with American Express, the cost can be a monthly charge of almost $1 for every $100 of your balance.

What isn’t covered by balance protection

While some balance protection plans may provide ample coverage, most only cover a credit card’s minimum monthly payments and not the entire outstanding balance. A policyholder who becomes ill or unemployed could still face the burden of enormous debt despite having purchased balance protection. While the insurance plan would prevent them from defaulting on their credit card, the unpaid balance would acquire interest charges and increase from month to month.

When people buy credit card balance protection insurance, they assume their insurance company will cover their entire outstanding balance. This is rarely the case.

Remember: many credit cards and issuing institutions only cover your minimum balance: $15 or 2% of your outstanding balance, whichever is greater. While this is helpful, it’s definitely not as helpful as paying your balance in full if you contract an illness or injury. Your credit rating can still be negatively affected as interest starts to add up quickly.

Is credit card balance protection insurance worth it?

Balance protection insurance might not be worth it for you if you have coverage under another policy. You must compare the costs and coverage that you would receive with other insurance options. With a term life insurance disability or critical illness riders disability insurance critical illness insurance, or your employer’s insurance plan, you may already have similar coverage, but there may be a significant difference in cost.

If you have enough funds to pay your balance or pay your balance in full each month, you may not require credit card balance insurance. Canadian credit card balance protection usually costs anywhere between $.99 to $1.19 per $100 of your average daily balance.

Lastly, remember that balance protection is optional. This coverage is sold as a separate product from your credit card and is not mandatory. You do not need to sign up for balance protection as a condition to receive approval for a credit card.

What are the alternatives to balance protection insurance?

The reason to take out balance insurance is that you’re looking to protect yourself or your family. However, if you die, your estate can use the proceeds from a life insurance policy to pay off your debts. If you think you need more coverage to pay down your credit card debt, it can be much more affordable for you to increase your life insurance coverage than to get separate balance protection coverage.

In the case of unemployment, remember, your balance protection insurance won’t actually pay off your balance. Usually, your balance protection lender will either defer your payment or pay the minimum monthly payment due. Instead of paying exorbitant monthly premiums, you’re far better off setting aside what you would have paid in balance protection fees into your savings account for an emergency fund.

Lastly, as mentioned above, critical illness and disability insurance are much more robust protection products to replace your income should you become ill or injured, and have the potential to pay off your debts in full.

Can you cancel balance protection insurance?

You can cancel balance protection at any time by checking with your insurer/provider. Just remember that your balance protection provider is often a different company than the financial institution that issued your credit card.

Who offers balance protection?

You can apply and sign up for balance protection in-person, over the phone, or online as long as you are the primary cardholder. You can purchase balance protection insurance from the same institution where you got your credit card.

Issuers include banks, credit unions, and other companies that offer credit cards. You don’t need to choose to add balance protection when you apply for or activate your credit card. Know that you can purchase balance protection from the insurer at any time.

With all this said, it is best if you take your time to research any insurance decision. In many instances, you may be better off purchasing or increasing other forms of coverage (like life, critical illness, or disability) than investing in balance protection and its applicable taxes.