Maybe you ran up your credit cards being a little over-generous during the holidays. Or perhaps you’ve been carrying a balance for years, but haven’t been able to pay it off.
Does it make sense to buy insurance in case you’re unable to make your payments?
Taking a cue from the still-struggling economy, credit card companies have ramped up their marketing of credit insurance, credit monitoring, identity theft protection services and other add-on products.
The new emphasis on these add-on services reflects that credit card companies are searching for ways to squeeze more profit from their businesses. They’re challenged by new regulations that tightened restrictions on fees and interest rates in recent years.
None of these products are new, but they are very profitable, said John Ulzheimer, president of consumer education for SmartCredit.com.
With credit card insurance, for instance, claims against the policies get paid out at a much lower rate than other types of insurance such as auto or home. That’s because claims are filed less frequently and because there are often restrictions making it difficult to use a policy.
The National Association of Insurance Commissioners calculated that consumers paid an average $3.2 billion in premiums per year for credit-related insurance, not including job-loss coverage, between 2001 and 2010. Meanwhile, insurance companies paid claims averaging just under $1.4 billion during that time. That’s a loss ratio of less than 44 percent.
In contrast, companies that sell life and property and casualty insurance typically report loss ratios nearer to 80 percent.
Credit card insurance policies promise to cover payments for a set period of time if the card user is hurt, falls ill, loses a job or has another reason to skip making payments like military reserve or guard call to duty. For the protection, customers pay a monthly premium, typically based on the size of their balance.
Consumers should carefully read the fine print before signing on, to make sure they understand what they’re buying, how much it will cost and whether it’s worth the price.
“Step one is to not get into so much debt that you can’t pay it off every month,” Ulzheimer said.
If it’s already too late for step one, step two should be some careful calculations. The insurance offered on cards issued by Citibank, for instance, charges 87 cents per $100 of each month’s balance. So a $2,000 balance would incur a fee of $17.40.
And that’s not the most expensive policy of this type. Premiums often run as high as 1 percent of balances, or a $20 charge for a $2,000 balance.
“If you took that amount of money and threw it into the balance, you could get out of debt that much faster,” Ulzheimer said. “If you never have to file a claim under the service, you’re actually getting into more credit card debt because of it.”
There may also be restrictions on when the policy kicks in — you might have to be out of work for more than 60 days before you can file a claim with some job-loss policies, for instance.
The NAIC offers tips on questions to ask before buying credit insurance here: http://bit.ly/x16N0I .
Likewise, ID theft insurance often comes with a host of restrictions. Policyholders can often only file claims on one ID theft incident per year, and it only applies if the theft was the result of an incident that happened after you bought the insurance — even if you were unaware of a prior data breach or other problem that allowed the theft to happen. There is also frequently a cap on the amount of coverage, which could in some cases be less than the actual losses.
Consultant Javelin Strategy and Research estimated about 20.7 million consumers purchased ID theft insurance last year.
Consumers should also pause before purchasing ID theft protection services, which has exploded in recent years. In August, Javelin forecast that about 25 million people would spend roughly $3.5 billion on such services in 2011.
The problem with these services is that they don’t really protect users from having their identity stolen. All they can do is monitor credit reports and let customers know when an application for new credit is made.
“They’re very reactive,” Ulzheimer said. “The monitoring services don’t let you know until something has happened. It’s like getting in a car accident and someone coming up and telling you you’ve been in a car accident.”
The services can help consumers handle changing accounts and the other elements of dealing with ID theft.
Credit card companies typically charge $12.95 to $19.95 per month for ID monitoring services.
A cheaper alternative is for consumers to monitor their credit reports themselves. They can request a free report each year from the three major credit reporting agencies. To start that process, go to www.annualcreditreport.com .