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Credit Card and Loan Insurance: More Complicated Than You Think

When you are borrowing money from a financial institution a common question is, “Would you like insurance protection?” For a monthly fee you can purchase ‘peace of mind’ – in the event of illness, job loss, or an accident, your loan/credit card payments may be paid on your behalf through the insurance company. Is it really that simple?

The short answer is: it’s never really that simple.

Chances are you have been asked if you want ‘balance protector insurance’ on your credit accounts – usually this question comes when you sign up for an account or when you renew a loan or card.  Like many people, you may already have insurance on your account(s) and not realize it (check your statement for a list of active charges).  In order for you to accept the insurance premiums added onto your monthly fees, you simply have to say “Yes” one time when they ask you over the phone. Since the conversation is recorded, the financial institution will always have proof that you approved the charges. You may have noticed that some agents seem incessant about the importance of obtaining the insurance – this is probably because they are going to get commission on every insurance premium that they sell.

Recently my daughter went to renew her credit card online, in an effort to avoid the pesky insurance questions over the phone. Rather than a breezy renewal, she encountered an even more evasive line of questioning online regarding the insurance premiums. The question was so vague and confusing that she sat for a few moments before clicking anything. What should have been a relatively straightforward process was suddenly not at all. She became concerned based on the wording that she was opting out of her credit card completely, instead of just the insurance. That’s how convoluted the entire process has become.

Here’s the issue – when companies want you to buy something, they will use aggressive tactics to get you to purchase it, unwittingly or not. I’ve heard stories of companies using fear mongering as a motivation to buy insurance: “What if you get cancer and can’t repay your credit card?” “What if you die – you don’t want to leave your kids with all of your debt, do you?” (For more information on this topic,read These tactics appeal to the ‘worrier’ in all of us and truly impact our decisions, especially in immediate situations where we can’t weigh the pros and cons before making a choice.

I’ve always been an advocate for insurance policies. They truly do offer you protection in the event of an unforeseeable circumstance or tragedy. An interesting point to note is that your current insurance policy may cover you in the event of an accident or tragedy if you cannot repay your debts (see this article), so you may not need additional coverage through your financial institution. During my 40+ years in the financial industry, I can honestly say that I have seen only a handful of clients who are eligible to use their loan protector insurance when they really needed it.

So, the bottom line is – yes, you should have some sort of an insurance policy that covers illness and injury, but it doesn’t necessarily need to be purchased from a financial institution.


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