Financial Security Insurance

Financial Security Insurance

A consumer rip-off that impacts millions of individuals yet goes unreported in the financial media is credit protection insurance. Never, ever, ever purchase "credit protection insurance," "payment protection plan," or any other name for an insurance policy that protects your credit. The typical consumer is getting a terrible bargain with these programs, so let's examine how they function.

Put the fraudulent version of this insurance out of our minds first. Con artists have taken advantage of the recent focus on identity theft by establishing telemarketing boiler rooms to harass unsuspecting consumers into purchasing credit insurance policies that do not provide any protection whatsoever. Salespeople will make you feel as though your safety is in jeopardy in the event that someone else uses your card fraudulently. Falsely claiming to be from your bank's "security department" is one tactic they may use when calling. They might be part of a larger identity theft ring trying to trick you into giving up sensitive information over the phone. Alternatively, they can be attempting to sell you unnecessary insurance coverage in order to make a quick profit.

In the event of fraudulent use of your credit card, your liability is capped at $50 per incident, per federal law. Pay no more for charges that you did not authorize! Resolve fraudulent charges by following the steps outlined by your credit card company. When it comes to matters that are already addressed by federal law, insurance isn't necessary.

The question then becomes how the major credit card companies' "payment protection plans" work. These policies guarantee to pay your minimum monthly payments for a long time (often 12–24 months) in the event that you lose your job, are sick or injured, or become incapacitated. This strategy seems reasonable at first glance. What if you were to unexpectedly lose your job or were too sick to work? How would you manage to keep up with your payments?

You shouldn't be using your credit cards anyhow, of course. Credit protection insurance, as we know it now, would not be necessary if all customers paid off their loans in full each month. If your card balance is zero, the insurance premium won't apply because it's tied to the amount you owe. Some bank personnel even utilize this to get customers to sign up for their payment protection plan's "free 3-month trial"! Their goal is to get you to add the insurance now, when it's free and you don't need it, so you'll end up with a balance later on. You will likely have forgotten that you even signed up by that point, and you will continue to be perplexed by the monthly costs that appear on your statement.

Credit insurance is still not a good idea if you use your cards for purchases. Looking at the math helps us understand why. The standard rate for a loss protection plan is 85 cents per $100 in available balance. Consequently, the insurance will set you back $42.50 monthly if your credit card balance is $5,000. In this case, your expenditure will amount to $510 spread out over 12 months. That's the same as adding 10% to your yearly interest payment!

At this very moment, a light bulb ought to be illuminating your mind. Why not put that same $42.50 toward paying off the debt more quickly? Excellent inquiry. The amount of money wasted can be quite astounding when you consider that most people who have credit protection carry it year after year without ever being able to make a claim.

Assuming we continue with our $5,000 example, paying off the loan in full will take over 26 years at an interest rate of $7,115.42, assuming an average minimum payment of $125 per month. You may pay off the debt in just 40 months if you put the additional $42.50 toward the payment instead of the insurance, bringing the total monthly payment to $167.50. Additionally, you will have avoided paying $5,435.22 in interest. Considering that most credit protection plans only last for a year or two anyway, squandering this money would be foolish.

Another crucial aspect is at play here. Because of the stringent criteria for eligibility, credit protection is also an awful bargain. There are a lot of things that aren't covered when you look at the small print. A medical ailment you've been battling for a while is one example. You rationalize your insurance purchase. In the end, you have to go to the hospital to get well. Does the thought of not having to worry about paying your credit card bills ease your mind a bit? No way. 

Exclusions for pre-existing conditions are common in most of these policies. The insurance has a lot of gaps that the bank can use to reject your claim. Given the flawed calculations and stringent requirements of this insurance policy, the correct term for these initiatives would be "bank profit protection" rather than "credit protection insurance." Spending a ton of money on an insurance policy you're unlikely to need is money better spent on paying off your debt faster.

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