TORONTO — When you get a new credit card, raise your credit limit or make other changes to a card you already have you may be offered credit card balance insurance.
It’s pitched as a way to protect yourself, in case you lose your job or get sick. But it’s also considered an expensive type of insurance and you may not even need it.
“People need to be aware it’s not cheap insurance, it can be quite expensive,” said Laurie Campbell, director of client financial wellness at Bromwich & Smith, a licensed insolvency trustee.
Balance insurance is offered by most credit card companies and many people think if they become ill or unemployed it will pay off their balances, but it will usually just make the minimum monthly payments.
You may be offered credit card balance insurance for the first one to three months for free, but then you’ll have to pay for it and you may want to think twice before saying yes.
Campbell said people who are carrying high balances on their credit cards should look at all their options.
“Is your money better saved or put toward the balance on your credit card then paying for this type of insurance? Another thing I say, if you are carrying a balance, look at ways to try and get rid of it,” said Campbell.
The federal government has reviewed the practice and determined that balance insurance is expensive, optional, comes with limitations and exclusions, and customers must agree to it.
In fact, customers may already have similar coverage if they have life or disability insurance elsewhere, according to the Financial Consumer Agency of Canada.
Matthew Inglis, with Regina-based Mobile Advisors, did an insurance investigation into credit card balance insurance with Canada’s major credit cards.
Some cards charge an insurance fee of $1.20 for every $100 owed on your credit card. If you had a balance of $2,000 you would have to pay insurance of $24 a month
Inglis said “the cost is astronomical” and called it a very profitable product.
“Credit card credit insurance providers pull in about $700 million from Canadians on an annual basis with a claims ratio of between $35 to $70 million. So it’s a very dismal claims ratio,” said Inglis.
In case of death or critical illness, the entire balance may be paid off, but pre-existing conditions could exclude someone from benefits.
The best advice if you are paying for this type of insurance is to have a good understanding of how it works or consider canceling it.
“A lot of people go for years with this type of credit card insurance and pay hundreds and hundreds of dollars for it without ever being able to access it,” said Campbell.
You can find out if you’re paying for this type of insurance by checking your credit card statement to see if monthly premiums are being taken out or you can call the number on the back of your card and ask customer service if you are signed up for it.
Then you can make a decision about whether or not it’s an insurance product that’s right for you.