We at DollarsAndSense have always maintained that if you have access to credit cards, you should enjoy the benefits of responsible credit card use, since they provide you with interest-free credit for a month, while allowing you to earn cashback, miles or discounts on the things you would otherwise pay cash on.
On the flip side, the dangers of snowballing credit card debt are also well-known and equally terrifying.
It might be because of this terror that lead banks to sell you a kind of insurance known as credit card balance insurance. A promoter might upsell this insurance to you at a roadshow when you sign up for a new credit card, or a telemarketer might call and offer it to you.
Should you consider getting it, just in case something happens to you? Let’s take a closer look at credit card balance insurance and weigh the pros and cons.
How Credit Card Insurance Works
The proposition that credit card insurance offer is that it pays off your outstanding credit card debt should something happen to you, such as death or Total Permanent Disability.
Both your premiums as well as your eligible payout are based on your monthly balance. Different banks have different coverage and payout terms, but the general principle is the same.
Think About Your Insurance Coverage Holistically
Insurance is a good thing and is valuable to have. But to properly evaluate credit card insurance, you need to think about how it fits in the big picture of your insurance coverage and that of your loved ones.
The quantum you pay for credit card insurance is low, since it is pegged to your monthly balance. But does that mean that credit card insurance is “cheap”?
To illustrate, let’s look at the OCBC CreditWise policy. If you have a balance of $10,000, you would be paying $40. Assuming you passed away due to an accident and qualify for the additional 50% benefit, your total payout would be $15,000.
Contrast this with a term insurance plan like the AIA Secure Term Plus II. For a 30-year old non-smoker male, the cost (including critical illness and Total Permanent Disability riders) for the same $15,000 payout is a mere $18 a month.
As you can see, when you compare the coverage you receive dollar-for-dollar with term insurance, credit card insurance is actually quite expensive.
Not All Banks Offer Credit Card Insurance
Since credit card insurance is a niche product, many banks and credit card issuers don’t offer it. Chances are you probably have a credit card that does not offer accompanying card insurance.
So, if credit card debt protection is a priority for you, then you already need to cater for additional coverage through other insurance plans.
There Are Other Ways To Handle Credit Card Debt
If you spent within your means (as you should!), you should theoretically already have the cash to pay off any credit card debts you are accruing.
Otherwise, as mentioned earlier, by having the appropriate life insurance, hospitalisation or disability income policies, you would be able to cover any (non-outrageous) credit card balance you might have, in a more cost-effective manner.
Possible Use Case: Temporary Spike In Credit Card Balance
Having said all of that above, there is one way credit card insurance can be useful. Since term, hospitalisation and life insurance are for the long term, it would not make sense to overpay for additional coverage just to cater for certain periods in your life where you are making big ticket purchases and are carrying a large balance. These could include furnishing your new home, paying for your wedding, or planned travel expenses.
In those situations, you might want additional peace of mind by ensuring the additional debt that you are liable for is covered in the event something untoward happens. Paying a little that month(s) might be a viable way to temporarily boost your coverage.
In most cases though, it is hard to imagine why you would want or need credit card insurance.
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