Credit Card Insurance
No sooner do you have a nice, shiny new credit card than the phone calls start. Would you like insurance, medical cover, extended this and extra that? The clever card holder resists the telephone sales pitches and reaches for the small print…
Rest Insured
Insurance comes in several flavours but the main sales pitches tend to be for credit card Payment Protection Insurance (PPI). These policies are designed to pay out if the card holder is unable to meet repayments due to sickness, an accident or losing their job. The plan is often offered on a card application form as a simple box to be ticked.
How much?
PPI policies cost a percentage of the outstanding balance on a card, usually just under 1%. This is shown as a charge of, say, 90p for every £100 of outstanding balance. Whilst this may not appear to be an excessive amount, it will in effect increase the APR of a card by 1%.
Good Credit Customers Lose Out
Card holders who pay off their card in full every month will still pay the PPI premium – on a balance that they then clear! Obviously, PPI insurance is designed to click in when card holders cannot make a payment, but for low users of cards with savings and a stable income at present, it is a waste of money.
Read the Fine Print
Wise card holders NEVER tick the protection box before reading the fine print, and with PPI policies, there is an awful lot of fine print. Card holders should check that their particular employment position is covered by the PPI; many self-employed people have taken policies only to discover that they are excluded. If in doubt, ring the underwriters and check; better to talk through it now than when under the stress of financial difficulties when making a claim.
Also, policies are invalid if the card holder knew at the time of application that they had an illness or faced imminent redundancy.
Time is Money
PPI policies usually have a finite payout term of twelve months, but the policy should have paid off all outstanding debts during that time. The irony is that the card holder must still make the PPI payments during this time to keep the policy active, even though it is paying out against the balance.
A Quick Example
Barclaycard PPI costs 79p for every £100 of outstanding balance, and pays out 10% of the balance total due from twelve months from the time of the claim, but only up to a maximum of £1,500 per month. On death, a balance of up to £15,000 can be paid off.
Closer examination of their nine page pdf of policy details reveals interesting details such as:
- The policy does not apply to the over 70s
- If you miss more than three premium payments the policy is void.
- For self-employed people to claim, they must have ceased trading and be in the process of having their business wound up.
Freeze that card!
If a claim is made and the policy is paying out, further purchases made on the card are NOT covered by the policy. After all, the policy is designed to alleviate debt in times of need, when only essential purchases should be made. For those claiming Income Support, there is one advantage of PPI policies, in that they are designed to cover a specific debt. Any payouts will therefore not affect the level of any Income Support payments.
Seeing Double
Card holders should check that any PPI policy does not overlap with any other income protection plan they may hold. There is simply no point in paying for the same cover twice, as an income protection plan would allow balances to be paid off as normal.
Cover All
A stand alone policy for all cards is offered by Paymentcare, which also charges a low 0.65% premium, a faster repayment schedule of six months rather than a year, and no premiums during a claim period.
Save for a Rainy Day
A PPI policy only covers the debt on the card on the day the claim is made. Rather than pay the 1% as an insurance premium, smart card holders might prefer to put 1% of the balance into a high rate savings account, let it grow with interest, and use that money as an emergency balance payoff sum if required.
