Card repayment insurance is meant to help cover your debt in the event you get sick, lose your job or become disabled. So far, so good. However, instead of buying peace of mind, you could end up paying hundreds of dollars a year for cover that doesn’t go as far as you think.
We’ve looked at card repayment policies and their limitations.
Premiums for credit card repayment policies range from 74 to 79¢ per $100, calculated on your monthly statement balance. The insurance is also offered on store finance cards with rates ranging from 63¢ to $1 per $100.
On an average monthly credit card balance of $3300 you could be paying premiums of $293 to $313 each year. A $10,000 monthly debt on a finance card could cost more than $1000 a year.
If you have any money owing on your card — either from the previous month or from new purchases during the month — you’ll pay. The only way to avoid paying the premium is to pay the balance before your statement date and then not use your card again that month.
If you don’t pay the insurance premium, it may be added to your debt and you’ll be charged interest.
Short of death or permanent disability, your payout under these policies is underwhelming.
Payouts for redundancy or temporary disability will usually be capped at 10 to 15 percent of your monthly card debt. They’ll stop after a period (six to 24 months) or once they reach the policy’s maximum cover limit.
If you have outstanding debt after that, you’re still on the hook.
Policies also limit cover if you’re in part-time or casual work, or self-employed: depending on the policy, you may not qualify for redundancy or disability cover. There can also be limits on cover once you hit age 65.
A bad rap
Credit card repayment insurance is a type of payment protection insurance (PPI), an insurance that’s got a bad rap.
The Commerce Commission has previously prosecuted cases where PPI had been mis-sold to consumers. It’s flagged mis-selling of PPI as a cause of consumer detriment and a potential breach of the Fair Trading Act.
In Australia, there are calls for greater controls on PPI sales (see Australian action). Since 2012, UK companies have been banned from selling PPI simultaneously with selling credit.
Here, companies are expected to make sure the policy meets the customer’s needs and premiums won’t cause financial hardship. But given the significant limitations of card repayment insurance, it’s unlikely to be the best choice for most consumers.
Of the major banks, ASB and Westpac said less than 10 percent of cardholders take out a policy. The others didn’t provide figures, claiming the information was commercially sensitive. With personal credit card balances standing at $6.1 billion, even if only a small percentage sign up, the sum paid for cover could run into millions.
If you want to make sure your credit card bills are covered if something dire happens, there are alternatives to card repayment insurance.
If you’re paying your credit card in full each month and have spare funds, open an interest-bearing savings account as an emergency fund.
You may already have cover if you’ve got other insurance policies, such as life or income protection. As well as cover for death, life insurance policies may pay out for terminal illness.
If you’re struggling to make card repayments, talk to your provider. Do so before you fall behind. Lenders are obliged to act responsibly. If you’re suffering hardship, you can apply for relief.