Credit card insurance schemes claim to help you clear credit card debt in the event of unforeseen circumstances – but are they really a good idea?
If you’re a regular credit card user, you might have received mailers inviting you to participate in credit card insurance schemes.
This is a type of insurance that covers your credit card debt. In case you’re placed in a difficult circumstance that affects your ability to pay your debt, credit card insurance will pay off your outstanding credit card bill.
But that’s not all. Credit card insurance payouts are typically pegged at several times of your debt. This could mean you have money left over to help deal with your current emergency. Some schemes also provide a payout (albeit smaller) in case you need a hospital stay.
Premiums are also cheap, ranging from S$0.40 to S$0.60 for every S$100 you owe. That means that if you owe S$5,000, you only need to pay around S$25 per month.
On the surface, credit card insurance seems like a good way to get peace of mind while dealing with credit card debt. You may even be tempted to use credit card insurance as a stand-in for regular life insurance.
However, is credit card insurance as good as it seems? If so, why isn’t everyone using it?
Upon closer inspection, several flaws start to become apparent. Before you sign up for credit card insurance, here are 3 important points to consider.
1. Your credit card debt becomes more expensive
Let’s take a look at the advertised premiums for credit card insurance schemes from 3 different banks:
|UOB CreditSure Plus
|S$0.55 per S$100 owed
|• Up to S$200,000 or 2.4 times of your aggregate credit limit (whichever is lower) for accidental death
• Up to S$100,000 or 1.2 times of your aggregate credit limit (whichever is lower) for death, total and permanent disability, or terminal illness
|Citibank Credit Insure Gold
|S$0.42 per S$100 owed
|• 4 times of your total outstanding balance (max S$80,000 or 2.4 times your credit limit, whichever is lower) upon death or diagnosis of a critical illness
• Up to S$3,000 of your total outstanding credit card balance in the case of hospitalisation beyond 7 days
|DBS CardCare Protector
|S$0.58 per S$100 owed
|• Up to S$100,000 for death, total and permanent disability, or early diagnosis of critical illness
• Up to S$200,000 for accidental death
You’ll notice that instead of a fixed amount, your premium goes up and down according to how much you owe. This makes sense, considering that the payout you will receive is based on how much you owe at the time of making the claim (up to a cap).
However, bear in mind that this premium you will be paying is added to your outstanding debt, which presents several disadvantages.
Firstly, you raise the effective interest rate of your credit card. We’ll spare you the maths but this means your credit card debt becomes even more expensive.
Secondly, if you only pay the minimum on your credit card each month (very likely if you have a high rollover balance), you are not covering the premium payment in full.
This means that the few extra dollars you incur each month will start accruing interest of their own, which raises your interest rate even more.
2. The cost of credit card insurance is exorbitant
We mentioned earlier that credit card insurance payouts are based on how much you owe, at the time you make the claim. There is also a maximum cap on the amount you may claim.
Although it is tempting to look at the maximum payout (up to S$200,000, in the case of DBS and UOB), it is unwise to anchor yourself on this number. To qualify for the maximum payout, you likely have to be holding a high amount of credit card debt.
Don’t be tempted to think the cost of insurance is limited to the premiums you pay each month. In fact, the true cost of insurance here is the sum total of the credit card interest you are charged every month, plus the monthly premium.
When you consider how much you are being charged each month, for the payout you are getting through your credit card insurance plan, you’ll realise that you’ll be better off with a regular insurance plan.
3. Payouts may be too small to be useful
Let’s say you fully intend to pay off every single cent of your outstanding debt and want insurance while you go about doing so.
Well, kudos to you for exercising financial responsibility. However, if you make a claim when you are nearly done paying off your debt, your payouts may be too small to be useful.
Keep in mind that credit card insurance only pays out in the event of critical illness, total and permanent disability, or death. These are catastrophic events with long-lasting effects, requiring substantial financial resources to cope with.
If you only manage to make a claim with only a couple of hundred dollars left to go, your payout will be chump change. This may or may not be acceptable to you. It all depends on how you think about the interest charges and premium payments you had been paying all along.
Credit card insurance has limited usefulness
Notwithstanding the 3 flaws we’ve discussed above, credit card insurance has its use.
If you have high credit card balance, insufficient insurance protection, and have dependents that would be severely affected by a disruption to your earning ability, then a credit card insurance scheme may prove useful to you.
Just remember that the mechanics of such a scheme means that your returns will be diminishing, so you should not include credit card insurance in your portfolio. Rather, think of it as a parachute on a descending plane – beyond a certain point, it becomes less useful, even unnecessary.
And one last thing: like all insurance schemes, credit card insurance is governed by strict rules and narrow definitions of events and occurrences. Be sure to understand exactly what you are buying before signing up.
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