One of the biggest worries of every borrower is – not being able to pay the money back. The consequences of having to deal with unpaid credit payments are scary. This is where credit insurance comes into the picture.
Credit insurance on a credit card pays for your outstanding credit card payments in the unfortunate event that you're unable to pay it. For instance, it covers your credit card bills when you're unable to pay due to the loss of a job, disability due to an accident or death. Though it seems similar to life insurance or personal accident insurance, there is a significant difference. Credit card insurance does not offer any payouts to you or your beneficiaries. Instead, the insurer ensures that the credit card company continues to receive payments on time, thereby protecting your credit history.
Here, in this guide, we take a closer look at what credit card insurance is, how it works, the benefits, costs, and more.
What is credit insurance on a credit card?
Also known as balance protection insurance, it pays outstanding balances on your credit card or makes monthly payments on your behalf to the card issuer in case of any unforeseen events like – loss of employment, disability, accident, or death. Simply put, it helps you continue your credit card payments during financial instabilities, thereby protecting your credit score from dropping due to missed or non-payments.
How does credit insurance on a credit card work?
Let’s explain how credit insurance works with an example. Consider Armash, a millennial who makes a lot of purchases on his credit card regularly. He runs up large credit card bills every month. Besides his credit card, he has several other EMI commitments, including home loan, car loan and a personal loan. As a result, he doesn't have an emergency fund to fall back on for rainy days. Also, he has not yet commenced with term insurance, personal accident insurance, or critical illness insurance to help during unforeseen events.
As a result, if his income reduces unexpectedly, due to a job loss, loss of pay, critical illness, disability due to an accident, or even death, he would find himself in a precarious financial situation. In such scenarios, paying his regular monthly credit card bills on time would not be possible.
By signing up for credit card insurance, Armash can protect himself in this situation. The insurance company will pay the outstanding balance (subject to limits mentioned in the policy) to the card issuer. Thus, he would be saved from losing his credit history. If he decides that he no longer requires the insurance for his credit card, he can stop paying the premiums for it.
What are the benefits of credit card insurance?
Credit card insurance offers two significant benefits:
It helps you pay your outstanding balance and monthly payments in case of loss of income, reduced pay, disability, death, or other unforeseen events.
Additionally, it helps to protect your good credit ratings, even when you suffer from a financial crisis.
What's all included in the credit card insurance cover?
The actual benefits covered by the policy will vary based on the insurance company you choose and the type of plan. However, all plans have a few general benefits like:
Coverage for disability due to an accident
Coverage for critical illness
Coverage for accidental death
Loss of limbs
Coverage for loss of job
Besides the standard benefits, specific plans are tailored to provide maximum coverage for particular target audiences like businessmen, students, spouses of the primary cardholder, etc. The benefit amount covered by the plan depends on the policy you have chosen. Some insurance plans include the total cost of the outstanding bills. In contrast, others cover the minimum monthly payments for a specified period.
Is credit card insurance worth it?
While credit card insurance has plenty of benefits, it's not for all. For instance, if you already have term insurance, critical illness insurance, health insurance, or adequate emergency funds, then you can give credit card insurance a skip. On the other hand, if you think that you will not be able to pay your credit card bills if something unexpected were to happen, then it's a wise choice to invest in credit card insurance.
What are the types of credit card insurance?
Here, we list the four common types of credit card insurance:
Credit life insurance – In this plan, the insurer pays all the outstanding balance of the cardholder in the unfortunate death of the cardholder.
Credit disability insurance – In this plan, the insurer pays a certain amount of the monthly credit card bills, in case the cardholder falls ills or gets terminally injured, leading to disability.
Credit involuntary unemployment insurance – If the cardholder faces involuntary unemployment, then the policy covers the monthly credit card bills, for the term mentioned.
How much does credit card insurance cost?
The cost of the plan depends on several factors like – type of policy, coverage, and insurance company. Premiums can be paid either as a single payment or as recurring payments.
Single premium – Here, the premium amount is paid only once during the policy initiation. The cardholder is protected for the entire tenure mentioned during policy purchase.
Monthly outstanding balance premium – Here, a small premium amount is added every month to the credit card bill. It's of two types:
Open-end account – Here, the premium amount varies every month, depending on the recent outstanding balance. The amount is mentioned as a separate charge in the credit card bill.
Closed-end account – Here, the premium is fixed every month and does not vary.
Failure to pay the premium leads to the cancellation of the insurance. Hence, cardholders can decide whether they want to pay for insurance or suspend it, based on their financial situation.
Credit Card Insurance is not mandatory
Depending on the various other insurance policies you hold, credit card insurance may not be required for you. Make sure to evaluate your current insurance plans and your financial situation to decide whether credit card insurance is worth paying or not. And, if you choose to buy it, make sure that you fully understand the terms and conditions so that you get the maximum benefits out of it.