A new year offers a fresh start, and thousands will make a New Year's resolution to get their financial matters more organized.
When sorting through various files regarding credit cards, many people may happen upon information regarding consumer credit insurance (CCI). In fact, some people may be paying for this insurance and not even realize that they have it. Not a good idea--fees can sometimes be as high as $25 to $30 a month.
What is consumer credit insurance?
Consumer credit insurance is a type of coverage designed to pay off the minimum monthly payment in the event that a credit user cannot make their payments. Credit insurance is offered frequently, so if you haven't heard of it yet, chances are that you will. It is offered by credit card companies, banks, stores, car dealers and other organizations.
The U.S. Government Accountability Office reports that credit insurance typically costs between $0.85 to $1.34 per month for each $100 of loan coverage. This means that if you carry a monthly balance of $3000, the insurance premium could cost you at least $25.50 each month. That may not seem like a lot, but small sums add up: $25.50 dollars a month costs you $306 per year, and that's assuming you are paying at the lowest end for CCI.
There are several types of consumer credit insurance:
- Credit disability insurance pays on your credit card bills if you become disabled.
- Credit involuntary unemployment insurance pays on your credit card bills if you are fired.
- Credit property insurance pays to fix or replace items bought on credit or used as collateral.
- Credit life insurance pays off a debt if the borrower dies.
A typical credit insurance policy offers:
- Voluntary enrollment
- Cancellation at any time
- Rates regulated by the state insurance commissioner, regardless of age, gender or health
- Premium fee calculated on current monthly balance
- Benefit of minimum monthly payment if borrower is disabled or unemployed
- Full payment benefit in the event of death or dismemberment, with a cap set typically at $10,000
- Personal credit rating maintained in good order in the event of disability or unemployment
The thing to remember is what most insurance offers don't eagerly highlight: most coverage pays only the minimum monthly payment each month.
So is consumer credit insurance worth the fee?
A strong debate exists regarding CCI. Supporters of credit insurance (usually those who offer it) say that it offers great protection for some credit users. For instance, a consumer who carries a large debt and who is in poor health may definitely benefit from the advantages of credit insurance should they become too ill to work.
Critics argue that it's a grand money maker for companies that offer the insurance, but a bad deal for consumers. They make a case that a life insurance policy could cost the consumer less and pay out more benefits. Indeed, the Consumer Credit Insurance Association notes that people who earn a lower income and don't have other types of insurance are the people who tend to use credit insurance the most.
Consumer Reports Online offers some helpful information on credit insurance for consumers who want to know more. Their report illustrates loss ratio (the proportion of claims paid by insurers to the amount of fees paid by consumers) and how it affects consumers.
So is it worth it? Usually, the expense of credit insurance outweighs the potential benefits. Because most insurers pay only the minimum monthly payment when a claim is made, a better alternative to credit insurance might be to pay down debt and set aside funds for emergencies such as illness or job loss. As always, being informed of all the options can help you make the decision.
Take some time to sort through those files, get organized, and make the best of the New Year!