Credit Protection Plans

You should review the benefits offered by the plan, evaluating whether you have these benefits already through another source, and assessing the price you will be paying for these benefits compared to the price at which they can be obtained elsewhere.

Most credit cards offer some type of plan. These cover death, disability, unemployment, or most recently, identity theft. Look at what the plans actually offer.

Death
First, you must ask and answer this question: In the event of your death, what amount would you need to address your total financial position and the needs of your estate? Usually, with this type of plan I recommend that people take a realistic look at the balances they normally carry on their credit cards. If you have some life insurance elsewhere and do not typically carry a balance on your cards then why carry the insurance? If you usually carry a balance on your cards, you examine the actual cost of the insurance, the amount of the benefit and the amount of the benefit you could obtain if the insurance were purchased through a separate policy. For example, if the insurance to pay off your credit card in the event of your death costs only .60 per $100 on the balance each month, that does not sound like much. But it would total approximately $72.00 per year in premiums to pay the balance of a $1000 account. If you purchased a life insurance policy directly from an insurance company, a $72 annual premium would get approximately $50,000 in insurance for a 45 year old non-smoking male. Let’s face it: there are very few times in life when most of us would consider ourselves a smart shopper by choosing to make a $72 purchase of an item valued at $1000 when we could get the item valued at $50,000 for the same price, yet consumers do it every day when purchasing credit life insurance.

Disability/Unemployment
These are essentially the same issue: an inability (long or short term) to generate income to meet your obligations. You would calculate the cost/benefit in the same manner as above. What does the monthly charge total for an annual premium and what type of benefit could I obtain through purchasing an unemployment or disability policy directly? For what type of public or private benefits do I already qualify? Unemployment through the state or disability through my employer? What types of conditions must be met? Are there delays in coverage such as requiring that you are disabled more than 180 days before your benefits kick in or unemployed through no fault of your own for more than 8 weeks? Does the insurance make just the minimum payment? Does filing a claim for the insurance close your account to further charges? How long will the insurance continue to make the minimum payment? Is there a maximum payout? Obtaining and weighing the answers to these questions will quickly clarify your needs in this area and the best means to meet those needs.

Identity Theft
This is a relatively new product. Look at what is offered by the program. Many of the programs I have seen are offering for a fee what you can do yourself at no cost. If you manage your ability to obtain one free credit report per year from each of the main three bureaus by pulling one bureau every 4 months, you can monitor your credit file regularly at no charge. Check out the action plan on the FTC’s website for steps to take in case you believe your identity has been compromised. These will be the same steps recommended by most advisors. In cases of identity theft, you usually must perform all of the leg-work yourself to prove your identity belongs to you and not to a third party, so while many plan providers will tell you what you need to do if your identity is compromised they cannot do it for you. Some states allow you to freeze your credit report so that no new credit can be granted without absolute proof of identity. This can be a hassle if you want to obtain credit (no more instant approvals) but can be worth the peace of mind. Remember, credit scores are just a snapshot in time of your credit history. Most people think that one’s credit score is a static thing. But they are not. They change with every new charge, balance paid down, new account opened, old account closed, and credit inquiry. Credit Scores are in a constant state of flux. It may be interesting to receive daily e-mails about the constant changes in your credit score, but eventually you come to realize there are no drastic changes in such a short term. The cost of these plans and the benefits offered vary widely. You must assess your needs- do you think that your information has been compromised, have you been a victim before, are you aware of personal information that has not been kept secure? The vast majority of identity theft is perpetrated by someone close to the victim. In most cases, people are unwilling to file a police complaint against a child, sibling, parent or friend and they work out the repayment on their own and accept the credit fallout. Without a police report, many creditors and plans will refuse to take up your claim.

It comes down to what is right for your financial position. I believe for most people, the policies for life, disability, unemployment and fraud that can be purchased directly from insurance carriers are more cost effective in terms of the benefits received. But you must do your research to determine what is right for you.

In the meantime, let me recommend that you start your emergency fund. Calculate what it would cost to run your household for a month and multiply it by 3, 4, 5 or 6 months depending on regional factors such as high unemployment or housing costs. Add to that figure the total of your liability in terms of copayments and deductibles (health, auto, home, etc.) for a year. This figure should be the amount you try to build into a savings account. This could seem like an unreachable figure, but it should be your savings goal. Then in the event that you become unemployed or disabled or have your credit compromised, you will have resources to fall back on until you are able to rectify the situation.

I hope this helps. Good luck with your continued financial management efforts.