The other day I received a call from my bank offering life and disability insurance for my credit card. The pitch was, in case of death, critical illness or disability, my credit card payments would be taken care of for only 0.98% of my credit card balance each month. This would keep me in good financial standing while sick, or ease the burden on my family in case of death.
What the woman on the other end of the telephone didn’t mention was that should such an unfortunate situation arise, the policy would only cover my minimum payments, or 3% of my balance.
I knew there was more that I wasn’t being told, but most folks are unaware of what these types of offers are really all about. The thought of how many people were going to sign up for this unnecessary insurance prompted me to write this post.
With this type of insurance, it’s important to understand that the beneficiary is the bank. And the bank is asking you to pay premiums for its own protection! These policies guarantee that in case of illness or disability, the bank will continue to receive MINIMUM payments on your debts (while your account continues to accumulate interest), or in the case of death, the bank could collect for your entire outstanding loan (up to a certain amount, in my case $15,000).
Most people are unaware of the standard practice of many banks to include credit life and disability insurance as part of personal loans. Often this insurance is treated as part of your loan obligation, which means that you’re paying interest on it to boot! Your banker will seldom disclose this hidden cost, so unless you’re savvy on the scheme, you’ll be enrolled in the program by default.
Plus, the bank receives up to 40% commission on reselling you this insurance policy simply for signing you up! Other than some kind of peace of mind, there really isn’t much in it for you. What’s worse, as a hook, these policies are often pushed as free for a period of time, but cancellation is not always that easy. It can be difficult to find contact information, and since the insurance company is not your bank, your bank’s customer service may not be able to help you.
There’s much better ways to protect yourself against accidental death, illness or disability that will benefit you and your family. A whole life policy obtained straight from your insurance agent is certainly less costly, and one policy can cover all your debt obligations, whereas what the banks offer cover only each credit card, credit line or loan individually. And, if your coverage exceeds your unpaid balances in case of death your family / beneficiaries will receive what remains. There are also better disability insurance plans.
What about when they call you?
In my credit card case, I refused insurance when I applied for my credit card, and have received a couple phone calls since, and declined both times. Had I agreed, simply by saying “yes” over the phone would have constituted agreement, even without a signature. So do be careful when the telemarketers call.
Telemarketers are trained to handle resistance, and will be persistent, so be firm. After a few “no, I just don’t want to’s” they will leave you be.
What about when you’re in negotiations with your banker?
It’s easy to feel intimidated when you’re face to face with a financial professional, but a firm “no, thank you” will work. If you suspect insurance may have been automatically written into your credit line or loan, ask your banker to explain the terms and conditions fully. If you’re at all unsure, take it home and research the policy before you sign anything.
If you do decide to take the insurance offered by your bank, make sure you have all the information you need to cancel your policy, and keep this information in a safe place.
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