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In this day and age, there appears to be insurance coverage for everything under the sun. While it’s always great to feel protected from life’s disasters, there is simply no need to purchase every kind of insurance available on the market. The question becomes, what insurance do I really need? 

One of the more confusing insurances on the market includes credit card balance protection insurance. This insurance is designed to protect your credit from severe damage in the event that you face financial hardship and can’t afford to pay your credit card bill. Sounds great, right? The reality is credit card balance protection insurance isn’t always the best option for many consumers.

The 5 most common insurance mistakes everyone should avoid.

How It Works?

Credit card balance protection insurance protects you financially in the event that you can’t pay your credit card bill on time. Usually, consumers cannot pay their credit card bill due to financial hardship that arises from an unexpected expense, illness, or loss of income. In order to obtain this benefit, you’re required to pay a monthly premium as you would with any other type of insurance. 

Because credit cards have some of the highest interest rates out there, credit card balance protection insurance can save you from racking up debt and damaging your credit. While this seems great on the surface, there are definitely drawbacks to using credit card balance protection insurance. 

How to tell if your insurance agent is misleading you, find out here.

What’s The Catch?

It’s not really about whether or not there is a catch, it’s more about what where your finances are as well as what credit card company you’re with. If your credit card and its balance are your major financial concern right now then, balance protection might be a good option.

The most important thing you need to do before signing up for credit card balance protection insurance is to make sure you read all the fine print and know exactly what is covered and what isn’t covered. Every credit card company’s balance protection plan will be different and some are significantly better than others:

  • Higher premiums to cover spouses
  • Some plans don’t cover disability requiring hospitalization
  • Some plans only cover your minimum payment, not your full balance
  • If your balance is always low then some high premiums may make the insurance policy a waste of money

Credit card balance protection is not as flexible as you might hope.  Just like mortgage insurance can only be used to help make your mortgage payments, credit card balance protection can only be used on your credit card. There are other forms of insurance, like disability or critical illness insurance, that you can be used to cover whatever you see fit, should you be unable to work. So for individuals who have concerns about their credit card balance as well as other financial obligations, credit card balance insurance may not be sufficient.

How Much Does Credit Card Balance Protection Insurance Cost? 

Unfortunately, credit card balance protection insurance doesn’t come with a “one price for all” option. The amount you pay in premiums depends on the individual’s level of risk. Cardholders with higher balances will pay higher premiums because there is a greater risk they will be unable to meet their credit card debt obligations. Other factors that are taken into consideration include sex, health, age, and financial product type. 

The amount you pay in premiums monthly is usually incremental based on your average outstanding balance. For example, if your average balance is $2,000 per month and your monthly premium is $0.85 per $100 dollars, your monthly premium would be $17 ($2,000 x 0.0085). 

Considering that a minimum credit card payment is usually under $20, you’d be better off saving the money you spend on monthly premiums. In the event that you can’t afford your credit card bill, you can use what you saved on monthly premiums to make the minimum payment.

Insurance basics all consumers should know about.

How Do I Apply For Credit Card Balance Protection Insurance? 

You can apply for credit card balance protection insurance in person, online, or by phone. The provider of the insurance will be the same business that you received the credit card from. Usually, this is a bank, credit union, caisses populaires, or another credit card provider. Of course, this means you’ll need to have a valid credit card to apply for the insurance. Keep in mind that each credit card you have requires its own credit card insurance. Just because you have coverage on one card does not mean that coverage will extend to another card. 

It is not mandatory that you sign up for credit card insurance when you apply for the card initially. You can sign up for credit card balance protection insurance whenever you like. Use this to your advantage, take the time to consider whether credit card balance protection insurance is right for you. 

Are There Fees Associated With Canceling My Credit Card Balance Protection Insurance? 

If you’re not getting any value out of your credit card balance protection insurance, you can cancel it at any time. Your certificate of insurance will notify you of any steps you need to take to cancel your insurance. More often than not, you need to contact the insurance company directly to complete the cancellation. Once you cancel the insurance, be sure to get a confirmation from the insurance company in writing. In general, there are no fees to cancel your credit card balance protection insurance. However, there could be a penalty if you cancel before the expiry date of the policy. 

Furthermore, there is something called a review period that most credit card balance protection insurance providers offer. The review period is typically 20 to 30 days after your coverage starts, depending on where you live in Canada. During the review period, you can cancel the policy and receive a refund for any premiums you’ve paid. Once the review period is over, your insurance company will continue to charge the premiums every month and you’ll receive coverage. 

Consider “Self-Insurance” Instead

Instead of using expensive credit card balance protection insurance that offers you little coverage, opt for self-insurance instead. You can insure yourself in three ways, purchase disability insurance, purchase life insurance, or have an emergency fund. Purchasing disability or life insurance will provide you with much more coverage in the event that you face a financial emergency. In addition, an emergency fund goes a long way when you incur an unexpected expense or loss of income. Self-insuring yourself will give you the most value.

Veronica Ott avatar on Loans Canada
Veronica Ott

Veronica is a writer who specializes in creating unique and educational personal finance content. She has extensive experience writing blog posts for companies in the financial sector. Veronica's background is in accounting as she graduated from Western University in 2017 with a degree in accounting. She is passionate about using her accounting expertise to help others with their personal finance questions and issues and enjoys using her writing to educate Canadian readers. When Veronica is not writing, she enjoys film, reading, travelling, going to the gym, and listening to music.

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