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Posted: 6:00 a.m. Saturday, April 19, 2014

Why Credit Protection Insurance Is A Rip-Off



By Clark Howard

ClarkHoward.com


Banks, credit card companies and really any company in the financial services industry are trying to steal your money right now by getting you to sign up for credit protection plans.

The basic pitch here is that your lender will take care of your minimum payments in the event you can't make your monthly credit card bill because of job loss or temporary disability.

An Oldie But Baddie

This is really a more current version of what's been called "croak and choke insurance" (aka mortgage life and disability insurance) in the real estate financing field. With croak and choke, you buy a policy that names your mortgage lender as beneficiary in the event of your death. And you get stuck paying premiums during the life of your loan that are roughly 10 times the free market rates for insurance.

In the credit card world, the sale of job loss insurance or disability insurance is a booming area. The Government Accountability Office reports that Americans spent roughly $2.5 million buying this garbage that protects lenders in 2009. Yet the payout amount was only $500 million in benefits. That's a benefit of about 20 cents on a dollar for the money you paid in. With insurance, the typical payout versus premium should be around 80 cents.

Measly Payout

Those stats are in line with numbers I saw last year in a newspaper report. Let's even say for a moment that if you lost a job or became temporarily unable to work that the benefits accrue to you, which is not the case, but which we'll say for argument's sake. Well, The Baltimore Sun reports that the actual benefit pay-out for every dollar you pay into the policy is a measly 21 cents.

If they'll give you the 21 cents, that is! David Lazarus of The Los Angeles Times  reports Citibank in particular does a lot to keep the terms of the program secret in the hopes it can avoid paying out benefits. In particular, they don't offer what Lazarus would consider transparent disclosure of the fact that you have to file for the benefit within 180 days of becoming jobless.

But here's the real joke, which is why Consumer Reports has been so against these things. If your credit card gets stolen, your maximum liability is capped at $50 by federal law. Many issuers even give what's called 'zero dollar liability.' Don't insure yourself against something that federal law already protects you from!

I call the whole thing a total theft of money. It's truly reverse bank robbery. The banks that control the bulk of the credit card portfolio in our country have conspired to figure out how to rip you off.

Don't Fall for the Ploys

Finally, one word on credit monitoring programs. They are a waste of your money and typically cost $120 to $180 annually. If you want credit monitoring, do it for free through CreditKarma.com. Discontinue your other rip off coverage.

And always remember, if the real goal is to protect identity from crooks who might open a new line of credit in your name, do a credit freeze.

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