Balance Protection Insurance can be a helpful tool to ensure you meet your payment obligations in the event that you can’t make payment, which could help avoid a negative impact on your credit score during troubled times.
As with any insurance, it comes with a cost, and understanding how credit card balance protection insurance works is important in deciding if it’s right for you.
What is Balance Protection Insurance?
Balance protection insurance, also referred to as credit card insurance, is an optional insurance product offered by credit card companies to their cardholders for a monthly fee.
You can choose to add it at any time and cancel it whenever you wish.
At its most basic, this coverage pays your minimum monthly payment for a specified time when a life event occurs that makes it impossible for you to pay.
Coverage generally includes total disability, disability requiring hospitalization, critical illness, involuntary unemployment, and loss of life.
Some policies also include a loss of self-employment income.
Coverage With Balance Protection Insurance
Insurers differ greatly in their coverage, as indicated in the certificate of insurance which outlines precise terms and conditions that could impact claims.
Depending on your card, balance protection insurance could offer supplementary benefits such as automatic coverage for your spouse in specific situations or payments towards your outstanding balance in the event your unable to work.
Nevertheless, some policies may not fully settle your balance or restrict payments to a specific maximum.
Thus, even with credit card balance protection insurance, your debt may still escalate in many instances.
The following are some of the most common coverages offered under balance protection insurance:
1. Total Disability
This coverage normally has a 30-day waiting period from the date of the event.
Most policies pay a monthly benefit until you are no longer totally disabled, you return to work, your outstanding balance is paid off, or until you reach the maximum allowable amount of insurance.
The insurer may request proof of disability at any time while collecting benefits.
Purchases after the claim date do not qualify for benefits.
Coverage may also include a maximum age limit.
2. Disability Requiring Hospitalization
This coverage may also have a waiting period of 24-hours from the start of uninterrupted hospitalization.
Coverage normally applies to hospitalization caused by accidental injury.
Most policies offer a lump sum benefit based on a percentage of your account balance up to a maximum amount to reduce or eliminate your account balance.
Common exclusions include hospitalization in a rest, convalescent, or nursing home as well as facilities treating drug or alcohol abuse, mental illness, and aged patients.
Most policies also include an age limit.
3. Critical Illness
Critical illness coverage may include a waiting period from the time of diagnosis until this benefits kicks in.
Typically, this is 30 days.
The insurer may pay a lump sum benefit in the amount equal to your account balance or up to the maximum amount, or a percentage of your balance up to a maximum amount for a specified period.
The policy may also include a maximum age limit.
4. Involuntary Unemployment
This coverage normally has a 30-day waiting period from the date of termination.
Typical coverage includes payment of your total monthly benefits towards your credit card balance, up to the maximum amount of your insurance.
Purchases after the claim date do not qualify for benefits.
The insurer may request proof of unemployment at any time while collecting benefits.
The policy may exclude self-employment and seasonal employment or limit benefits for temporary or contract work.
There may also be an age limit on the policy.
5. Loss of Life
Balance protection may pay an amount equal to your balance on your account prior to death.
However, most policies include a maximum amount payable.
This amount is applied against your outstanding balance to reduce or extinguish it.
The policy may also include a maximum age limit.
Don’t Forget!
Balance protection insurance may not pay off your debt. Your outstanding balance could continue to accrue interest, increasing your debt each month.
Typical Cost of Credit Card Balance Protection Insurance
For the purposes of this article, we’ll use RBC’s BalanceProtector Premiere Plus plan as an example.
It includes coverage for total disability, involuntary unemployment, and loss of self-employment income up to 10% of your account balance for up to 10 months (maximum $25,000).
The stated cost is $1.19 per $100 of your insured balance, plus taxes.
The rate drops at age 70 to $0.59 per $100 of your insured balance, plus taxes.
Your insured balance is your outstanding balance in most regions, except Quebec.
In Quebec, this represents the average daily balance on your account.
RBC explains you will pay $5.95 per month plus tax on an insured balance of $500.
You don’t pay premiums when you don’t have a balance or activity on your card.
Premiums are also refunded during qualifying claim periods.
Is Credit Card Balance Protection Insurance Worth It?
While RBC’s example makes this insurance coverage sound affordable, let’s consider another scenario.
Let’s say you have a $2,500 outstanding balance on your card.
At $1.19 per $100, that works out to $29.75 plus taxes each and every month for something you may never use.
This amount is added to your credit balance, so you’ll add to your debt and pay interest on any unpaid balance.
However, Canadians already have employment insurance and health care.
You may have life insurance too.
If you already have these protections, does this expensive insurance make sense? Probably not.
Generally, Canadians may be better off putting this money into an emergency fund they can access whenever they need it.
It isn’t subject to exceptions or exclusions and the emergency funds can be placed into a liquid investment as well.
