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Do you need balance protection insurance for your credit card?

Woman shopping using tablet pc and credit card

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In the last few months, more than one telemarketer has tried to sell me balance protection insurance for my credit card.

If you have the appropriate life insurance, disability insurance, and rainy day funds in place, you would never need a product like this. But of course, not everyone has all their ducks in a row, so perhaps balance insurance protection seems tempting.

If you are not familiar with it, balance protection insurance is designed to reduce the burden of repaying debt in cases where a person's income is interrupted by unforeseen events like a job loss, disability, critical illness, or death. Basically, you pay a premium tied to how much you owe on your credit card. The specific benefits range, with some companies covering the minimum payments for you if you lose your job, and others that might pay off the entire balance if you die.

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You might have this insurance and not even know it. Sometimes it is part of the credit card application process - or maybe you signed up for a free 30-day trial period and forgot to cancel.

The premiums you pay will vary by company, but if the charge is $1.20 for each $100 of the amount you owe, that would be 1.2 per cent a month. This is also subject to sales tax. I'll spare you the calculations: in this case, it amounts to bumping up your 28 per cent interest credit card to north of 40 per cent, if you carry a balance, since you have the interest charges to pay plus the premium for your balance protection insurance.

You might think that if you have this insurance but don't carry a balance, you'll have no monthly charges to cover. However, that's not always the case. In many cases, the fine print will reveal the charge is based on the daily average balance. Assuming you have a 30 day billing cycle, if you make a $500 purchase and then pay off that entire amount 15 days later, your average balance for the 30 days would be $250. At a rate of $1.20 per $100 plus sales tax, you would be charged $3.24. Rates and premium calculations vary by provider, so make sure to read the details of your coverage if you do have it or are thinking about getting it.

Another compelling reason to read the fine print are exclusions for things you might logically assume are covered. Here are some I found in one credit card balance protection policy that advertises a benefit payable if you suffer a critical illness or involuntary loss of employment: skin cancer that has not spread beyond the deepest layer of the skin, stage A (T1A or T1B) prostate cancer, and transient ischemic attacks (TIAs or mini-stroke) won't trigger a critical illness benefit. Many people may just assume a heart attack, cancer, or stroke means all heart attacks, all cancers, and all types of stroke.

With respect to the loss of a job, if you were working less than 25 hours a week, then losing that job may not qualify as loss of employment. I can't imagine people being too happy about losing their job, not getting coverage they thought they were going to get, and then still being charged a monthly premium.

The first thing to do is take a look at your credit card statements and see if you have balance protection insurance. It will likely show up right on your monthly list of transactions. If you do and you're not sure if you should cancel it, ask a financial planner for a review of your overall insurance coverage and financial emergency preparedness.

It's possible that you have more robust coverage through your work or through a private insurance plan already. If not, you could find out that getting your ducks in a row may not be as costly as you think, especially when you factor in the savings of dropping unneeded coverage.

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Preet Banerjee, a personal finance expert, is the host of Million Dollar Neighbourhood on The Oprah Winfrey Network and author of the new book, Stop Over-Thinking Your Money! Follow him on Twitter at @preetbanerjee.

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About the Author
Personal Finance columnist

Preet Banerjee is a consultant to the financial services industry. You can follow him on twitter at  @PreetBanerjee. You can find his conflict of interest disclosure on his website. More

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