Is It Worthwhile To Pay For Credit Card Payment Protection?

Many credit card companies urge their consumers to consider buying credit card payment protection.  This type of insurance can put your payments and interest accrual on hold should you become unemployed (for up to 24 months in some cases).  In the event of your death, payment protection can pay off the remainder of your credit card balance.  The question to ask is if it is a wise use of your money.  Consider my parents’ own example.

An Example Of Utilization Of Payment Protection

At the end of 1985, my mom and dad were 36 and 37, respectively.  They had just gotten on their feet again financially because my dad had finally been able to obtain a job after two years of unemployment.  They had $10,000 in credit card debt (mainly because they used credit to help float them through the long stretch of unemployment).  In today’s dollars, that is $20,000 in credit card debt.

They had not taken out individual, private life insurance policies because they thought they couldn’t afford them.  What they did have were two small life insurance policies, one from my dad’s employer that covered him automatically, and one from the credit union that they paid a small amount for monthly.  His total life insurance protection was less than 2 times his annual income, and he was the primary breadwinner.  They also had credit card payment protection on their cards.

Six months later, my dad passed away; he was diagnosed with colon cancer in late January and passed away by early May.  My mom was very grateful for the credit card payment protection as the balances were paid in full upon my father’s death, and she used the little bit of life insurance to pay off their house.

Why Credit Card Payment Protection Is Not A Wise Investment

Based on this experience, one might expect me to endorse credit card payment protection plans, but I do not.   Most plans require that the user pay an amount per hundred dollars owed on the card, usually .89 to .95 per $100.  In today’s dollars, getting payment protection on my parents’ credit card debt of $20,000 would cost them an average of $178 a month in payment protection alone.  To make matters worse, many cards offer a maximum payout amount, ranging from as low as $5,000 up to $25,000.

Most term life insurance policies cost far less than the amount someone $20,000 in credit card debt would pay on payment protection coverage. For example, my husband and I each took out 20 year term life insurance equal to 10x our income when we were 31 and 33 respectively.  My husband’s policy costs us $32 a month, which is far cheaper than the $178 a month required for payment protection to cover $20,000 of credit card debt.  I would love to go back in time and tell my parents to forgo the credit card payment protection and to instead buy term life insurance policies for each of them.

While the credit card debt was wiped out upon my father’s death and the house was paid off, because they were underinsured, my mom only had a small amount of money to live off for the first year after my dad’s death.  She had been a homemaker and an in-home child care provider for the 15 years they were married; she had no college education, and yet she found herself having to enter the workforce.  The term life insurance policy, had they purchased one, would have provided her with enough money to pay off the credit cards and her home and still have money to invest and live off, giving her time to pursue her education so she could have found  a career she enjoyed.

Even if life insurance policies were more costly 25 years ago, it still would have made more sense to buy a term life insurance policy instead of payment protection as it provides much greater security.  Instead of paying for credit card payment protection, calculate how much it would cost you monthly and use that money to invest in a term life insurance policy.  Use the remainder, if you have a remainder, to pay down your debt so you don’t need to worry about payment protection.