Balance protection may be more hassle than help

Credit card balance protection insurance is meant to help you or your next of kin pay at least your minimum balance should you become disabled, lose your job, or face a critical illness or death. However, most financial planners say the insurance isn't worth the cost. Your independent insurance plan likely already has you covered, with fewer caveats.

High premiums, low payouts
When it comes to balance protection insurance, "buyer beware" is a warning that really holds true.

"There are so many details, exclusions and challenges with claims, high premiums and low payouts," says Trevor Van Nest, a certified financial planner and money coach who heads York Region Money Coaches. "It's one of those products where banks make a lot of money selling it and you really don't hear about a lot of claims and payouts for it."

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Credit card balance protection insurance plans vary between providers, but they all cover either your minimum payment or a percentage of
your balance owing, as long as your circumstances qualify.

For example, Toronto Dominion (TD) Bank offers monthly benefit payments to your credit card of either 5 per cent or 10 per cent of your total balance, depending on the plan. If you are still eligible for benefits after a year, the coverage could make a one-time lump sum payment
to your credit card, up to a maximum of $25,000. The monthly cost is 99 cents (plus taxes) per $100 of your average daily card balance, or 59 cents if you're 66 years old or older.

"If you're paying typically a dollar for every $100 of coverage every single month, and you owe $3,000 of the balance, you're paying
almost $400 a year when the coverage ... may only pay out somewhere around $90 a month," says Van Nest. He calculates you'd have to claim at least four months of the benefit just to get a year's worth of money back. If you pay for insurance for several years, you're looking at having to use the benefit for at least 12 months before you break even.

"When it comes to creditor insurance, it's typically better to find a cheaper alternative and invest the difference," says Van Nest.

You may pay even if you don't carry a balance
Even if you dutifully pay your credit card balance every month, and you don't have a balance to calculate the dollar per $100 owed, you'll likely pay for balance protection insurance.

Banks can calculate balance protection premiums by taking your average daily balance. With the average daily balance, even if you pay the balance off in full every month, if you owed money on any day during the month, the balance protection cost is taken from an average of what you owed every day, regardless of whether you still owe anything when the statement arrives.

"If you pay your credit card in full every month and you're working off the first statement balance calculation, then whatever is on your statement will factor into the calculation of how much you owe," says Van Nest. "The way to avoid that is to pay off the balance before the statement cuts."

You may not even be covered
The fine print around balance protection insurance is complex and specific. For example, Van Nest explains if your death is due to suicide within the first six months of the policy, this likely will disqualify your beneficiaries from a payout.

"The adjudication process definitely happens after the fact, and what a lot of people don't recognize is there are so many exclusions," he says. "Just because you had a heart attack doesn't mean you're covered because there might be different definitions of heart attack that yours fell outside of."

Even the definition of "losing your job" can be ambiguous with balance protection insurance, Van Nest says. For instance, he explains, in some plans, working less than 25 hours a week disqualifies you from using your credit card insurance. "The devil's in the details," he says.

Not to mention, many balance protection insurance plans engage in post-claim underwriting, where you are assessed on whether you qualify for the benefit at the time of claim and after you've already been paying the premiums.

"There's nothing worse than thinking you will be covered and then finding out you're not," says Van Nest. Instead of balance protection insurance, he recommends having a separate disability and life insurance plan that clearly states what's covered and when.

"It's always better to get a separate plan where you're working with a financial professional to get the coverage that you need, knowing that you will be covered," Van Nest says.

See also: Overlooking purchase insurance can be costly; Should you use your credit card car rental coverage?

 

Updated December 4, 2015

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