|Gary Foreman is a former Certified Financial Planner (CFP) who currently writes
about family finances and edits
The Dollar Stretcher website
http://www.stretcher.com. You'll find hundreds of FREE
articles to stretch your day and your budget!
“Circumstances are the rulers of the weak; they
are but the instruments of the wise.” Samuel Lover
It doesn't take a genius to notice that our
financial circumstances have changed in the last few years. But, it does take
some thought to recognize which strategies are still sound and which ones need
to be changed. Today we're going to talk about one that may need to be changed
depending on your circumstances.
For years credit card holders have had the option
of buying 'credit card insurance' on their accounts. There are a number of
different forms. Some pay your account if you die. Others pay if you're
disabled. The one that we're going to consider pays if you lose your job.
Before we begin, let's take a moment to discuss
why we buy insurance. In it's purest sense, we buy insurance to pay for losses
that we cannot afford to absorb ourselves. Often these losses are sudden,
unexpected or out of our control. Think car accidents or a home fire or
Typically, it's foolish to buy insurance for
things that we can afford to cover. You wouldn't buy insurance to pay for your
next tank of gas. Presumably you can afford it and the paperwork plus the
insurance company profit would just add to the cost.
The second thing to recognize is that it's
usually cheaper to buy insurance that's broader. For instance regular term life
insurance (that you can use however you like) is going to be cheaper than credit
card life insurance (that will only pay your credit card bill).
OK, so today we're going to look at "involuntary
unemployment credit card insurance". That's insurance that will pay if you lose
For years, I've advised against this type of
insurance. It's expensive. And, it's limited in what it covers. In fact, it's
been a big money-maker for the credit card companies. Plus, you shouldn't carry
a balance that you couldn't handle if you lost a job temporarily.
But, circumstances change. Given the economy,
many people are concerned about losing their job. And, they're right. There is
more risk than usual. It's only smart to consider how safe your job is. If
you're not sure,
here's a simple quiz that can tell you how risky your situation is. It was
developed by a group of mathematicians who specialize in forecasting.
If you think that there's a reasonable chance
that you could lose your job you should consider "involuntary unemployment
credit card insurance."
Let's learn a little more about it. In the case
of layoff they will make your minimum payment. The insurance only covers the
payment on that one specific card. So if you have more than one open balance,
you'll need more than one insurance policy.
Generally, they won't pay right away. You'll need
to continue making the payment until you've verified that the insurance is
paying your bill. If you don't pay and they don't either, you'll be facing late
payment fees and a lower credit score.
You will need to meet the involuntary
unemployment standards. Usually the insurance probably will not pay if your
hours are cut by less than 50%.
The insurance will only make your minimum
payment. It will not pay off th entire balance. That means that the unpaid
balance will still be growing due to the interest charged. The insurance will
only pay for a maximum number of months or a maximum dollar amount. So your
payment is not covered forever.
They will not make minimum payments on anything
charged after you are laid off. That can be important if you plan on using that
card to help tide you over after a layoff.
Now that we know something about it, what steps
would you take to investigate further? You'd begin by calling the credit card
company. They'll put you through to someone who should know how their policy
Ask them how much it will cost. They should give
you a cost per $1,000 of account balance and also tell you how much it would
cost on your current balance.
Find out exactly what has to happen and what you
need to do for them to make your payment. Know what is excluded. If you don't
understand, ask questions until you do. Don't 'think' you know what's covered.
Make sure you're clear who needs to be
unemployed. Is it your account? Your spouse's? A joint account? Know who needs
to lose their job for the insurance to be triggered.
Find out what it will take to cancel the
insurance later. Hopefully your job will be more secure at some point in the
future and the insurance will not be necessary.
Decide what credit card you would use for routine
purchases. Would that affect which cards you insure?
Once you've gathered your information give
yourself a day to think about it. Discuss it with your spouse or a trusted
One final warning. Scammers may call you and
claim to be from the credit card company. Do NOT give them your card number. If
you want to buy the insurance, make sure that you're the one doing the calling.