Credit Card Protection Insurance: Is It worth it?

For example, life insurance pays your beneficiaries if you die, there is no benefit to you.

Credit card protection insurance, or credit card balance insurance, helps to pay a portion of your balance (sometimes all of it), because of unfortunate situations like job loss, critical illness, or death. And just like life insurance, it doesn’t always make sense to pay for it.

Insurance is a funny product. You pay for it to cover your risk against unforeseen events. Despite paying for it, you hope to never have to use it.

Let’s dive deeper to figure out what it is, weigh its pros and cons, and help you make a smart money decision.

What is Credit Card Protection Insurance and How Does it Work?

Balance protection is insurance for credit card users that covers the minimum monthly payment when you can't pay because of specific situations like illness or sudden job loss.

So, you land in the hospital, your union goes on strike, and you can’t work because of injury, credit card protection ensures you pay the minimum amount due on your bill to avoid negative affects on your credit score and but you’ll still be hit with hefty interest charges.

Credit card protection insurance is optional and sold as a peace of mind coverage.

It’s expensive and may not be the best insurance for your needs, though this depends on your age, health, and your credit card balance.

The amount you owe on your credit card will determine the monthly premium you have to pay for the coverage—the higher your credit card balance, the costlier the insurance.

Whether it’s a bank, credit union or store credit card that sold you the insurance, they’ll calculate the premium based on an “average daily balance.” But, before you jump, understand that it’s not, “I bought nothing on my credit card this week, so the zeroes will reduce my premium!”

No, that’s not how it works. Even if you pay off your credit card every month, you’ll still have to pay.

Let’s make it make sense.

Evaluating the Cost-Benefit of Credit Card Protection Insurance

You bought credit card protection insurance because hey, for $0.95 for every $100, that’s a steal! Right? Wrong.

Here’s the math:

There are 31 days in July.

On day one, you spend $1,000. After five days, the “sum of your daily balance” is $5,000. Essentially, you had a $1,000 balance, every day for five days (5 x $1,000 = $5,000)

If you spend another $1,000 on day six, your credit card balance due is $2,000. And let’s say you hold off on any more purchases for 10 days, your new daily balance sum is $20,000 (10 days x $2,000 = $20,000).

On day 15, you charge another $2,000, your credit card balance is $4,000 and while you make no more purchases on this card, the sum of your daily balance for this period is $64,000 (16 days x $4,000 = $64,000).

The total of your daily balance in July is $89,000 ($5,000 + $20,000 + $64,000).

But now we need the average daily balance.

We’ll take our total of $89,000 and divide it by the number of days, which in July is 31.

$89,000/31days = $2,870.96.

Now, let’s return to our premium cost of $0.95 for every $100, or per day it’s $0.0095.

$2870.96 x $0.0095 = $27.27.

While $27.27 may not seem like much money over a year, that’s $327.24 for a rolling credit card balance of $4,000 per month.

For comparison, if you buy a $50,000 critical illness insurance policy, it might cost around the same $25 range per month. So, if you need to claim critical illness, your credit card insurance would give you at most the total balance of your credit card, which, let’s say is $4,000, but a proper critical illness insurance policy will give you $50,000 for the same coverage. You can pay off your credit card and have money to sustain your living expenses for a few months.

Let’s compare a few more factors.

7 Factors to consider before purchasing credit card protection insurance

1. Your Personal Finances. If you’re paying off your balance every month, earn a decent income, and have an emergency fund with 3-6 months of living expenses for those unexpected events, do you really need credit card protection insurance? Or is it an extra cost like a streaming service you never watch?

2. Coverage Options. Evaluate the specific coverage options provided by the insurance. Understand your coverage for risks like fraud, identity theft, disability, or job loss, and ensure that the policy aligns with your needs.

3. Policy Exclusions and Limitations. Nobody wants to read the fine print, but it could cost you if you don’t. Understand any exclusions or limitations that may affect your ability to make claims. Here are some common exclusions.

   • Pre-existing conditions. Coverage may exclude pre-existing medical conditions (e.g. cancer, diabetes, colitis, etc.), meaning any claims related to those conditions may not be covered.

   • Waiting period: Some policies coverage for job loss or disability may have a waiting period before you can make a claim.

   • High-Risk Activities. Claims related to injuries that happen during extreme sports (e.g. skydiving) or high-risk jobs may not be covered.

   • Intentional Acts. Claims because of fraud or deliberate misuse of the card likely won’t be covered.

   • Claim Limits. Claim amounts may be capped up to a maximum amount (that may not cover your full credit card balance).

   • Excluded Events. This can include acts of war, natural disasters, or losses because of government actions or regulations.

4. Customer Reviews. Search Reddit threads for credit card protection insurance + [insert supplier] and look for feedback on their claim process, customer service, and overall satisfaction. Everyone’s claims will be different, but look for common trends to set your expectations.

5. Policy Terms, Renewal and Cancellation. Review the policy terms, including the duration of coverage and the renewal process. Are there any fees or penalties if you choose to cancel?

6. Shop the market. Get quotes from multiple insurance providers and compare coverage options, premiums, deductibles, and any additional features offered. This allows you to make an informed decision and choose the most suitable option.

7. Cost and Benefits. How much does the coverage cost and what is the benefit you receive? Is it worth it?

Maybe we need to dig a little deeper, let’s do it!

Comparing the costs and benefits of credit card protection insurance

The benefits you receive from credit card coverage depend on the specific terms of your policy. You can find the terms on the insurance certificate. Here are the amount and duration of benefits as they apply to your claim.

• If you experience job loss, injury, or disability, balance insurance may pay a portion of your credit card balance. Typically, this is around 10% to 20% of your balance, up to a maximum amount. These benefits are usually provided monthly for 5 to 10 months or until you reach a predetermined cap on the total benefits.

• In the unfortunate event of critical illness or death, balance insurance may cover your entire balance or up to a maximum amount.

NOTE: credit card balance insurance only covers the amount you owed on your credit card at the time of the loss. Any purchases made on your credit card after the date of loss will not be covered.

Alternatives to credit card protection insurance

Is credit card protection insurance necessary?

Whether credit card protection insurance is necessary depends on your individual circumstances and preferences. Yes, it can offer peace of mind and financial security, but its value varies. Consider factors such as personal financial situation, existing coverage, and the likelihood of utilizing the benefits and weigh your options accordingly.

What does credit card protection insurance cover?

Depending on your insurance provider, credit card protection may offer coverage for:

• Fraudulent charges and unauthorized transactions

• Identity theft protection

• Loss or theft of credit card

• Minimum monthly payments in case of job loss, disability, or illness

• Accidental death or dismemberment

• Emergency card replacement and cash advance assistance

• Help with resolving credit card billing errors

• Coverage for certain travel-related incidents, such as trip cancellation or delay

• Protection against certain liability arising from unauthorized card use

In most cases, simply by checking in on your credit card balance every few days, you can prevent fraudulent charges by calling your credit card company. Lose your credit card? You can often lock your card from your online account. For every coverage, there is an alternate solution that doesn’t have to cost you any money.

Tips for making an informed decision about credit card protection insurance

My number one tip before buying credit card protection insurance is to dig deep into your alternatives.

Whether on your own or with a partner, you should have regular money check-ins and ask yourself:

• What happens in a job loss? If you’re fired or laid off, you’ll likely qualify for employment insurance benefits. If you’re fired With Cause or quit, you often can’t claim benefits. An emergency fund will do wonders for your finances and mental health.

• What happens in case of injury or disability? If you’re paying into employment insurance, there is a 16-week plan and your province may also have a disability support program. Your employer may offer short-term and long-term disability as well.

• What happens in case of death? It makes far better financial sense to buy a term life insurance policy.

• What happens if you’re travelling? A $120 annual fee travel credit card will typically have travel accident insurance, trip cancellation and delay insurance and more.

• What happens if you suspect fraud, unauthorized card usage, lost or stolen card, need an emergency replacement card or anything to do with the credit card itself? By staying on top of your credit card daily, you can spot any problems immediately and your credit card provider will help you solve them. They want to keep you happy as a customer and loyal to their product.

I bet you can put your money to better use. Feeling lucky?