Buzz
A payment protection plan provides credit card insurance, offering a tempting benefit: in times of difficulty, it can pause your minimum monthly payments for extended periods, saving you from extra charges and protecting your credit score. But, does the cost of the monthly fee make it worthwhile?
What does a payment protection plan entail?
Payment protection (also known as “credit card protection insurance,” “credit shield,” or “credit safeguard”) is an optional service that usually costs a small monthly fee based on a percentage of your balance. It can temporarily halt payments (typically up to 18 months) if an event like unemployment or disability occurs. Some plans may even erase credit card debt in case of death. Sounds promising, right?
The drawbacks
Getting approved for payment protection can be tricky, even if you decide to pay upfront before facing any hardships. Many plans come with a long list of conditions and exclusions hidden in the fine print. A GAO report revealed that 24% of benefit claims were rejected, with more than half of the denials due to the cardholder failing to provide sufficient documentation. This lack of clarity caught the attention of regulators in 2012, prompting some large banks to abandon the product entirely (which could explain why it's now marketed under many different names).
Here are some reasons you may not be able to claim full benefits or get the most out of your claim, as outlined by Investopedia:
You have an existing health condition.
If you’re a seasonal, part-time, or self-employed worker, you may not qualify for unemployment benefits.
You might hit a limit on the number of triggering events you can claim per year.
There could be caps on larger payouts like debt cancellation.
You may need to have been employed for several months before enrolling to be eligible.
Your documentation (as determined by your insurer) may be insufficient to prove your disability, job loss, or other condition.
You might need to be disabled for any job you're qualified for, not just the one you currently hold.
The list of exclusions continues. You must thoroughly review every detail of the policy— and even if you think you're fully informed, interpreting the terms can turn into a struggle between you and your lender.
The verdict
Payment protection plans offer limited advantages, usually only pausing your minimum payments and interest for a brief time, and may not cover all types of emergencies. Instead of paying monthly fees, consider using that money for life or disability insurance, which provides more comprehensive coverage. Another strategy is to save up an emergency fund to prepare for potential hardships ahead. Even better, many credit cards are currently offering forbearance programs due to the pandemic; simply reach out to them directly to request assistance. After all, why pay for what you can get for free?
