Credit Card Insurance Explained

When cash starts to run dry at the end of the month, or when spreading the cost of a big payout is the only option, credit cards can prove to be one of life’s great little inventions. Provided you can keep the payments in check, a card is still one of the most effective and simplest ways of paying for things you would otherwise never be able to afford. But what if you were suddenly unable to make payments on the monthly balance through losing your income? Fear not, a credit card insurance policy could be the answer.

While most of us take out insurance on things like cars and houses without a second thought, it’s easy to forget that you can also cover your ability to meet financial commitments too. Should you fall very ill, have an accident and be laid up injured, or be handed a notice of redundancy, the usually useful credit card can soon present a potential hazard. That is where credit card insurance comes in.

Credit Card Insurance from Burgesses

For some a card debt can be the biggest worry they would have if put out of financial action. For those without a mortgage, or a particularly big outstanding balance, the consequences of not being able to make payments do not bare thinking about and are perhaps a dominant money-related worry. Failure to make minimum repayments can see a card debt passed on to a debt collection agency, with predictably bad effects on a person’s credit rating and future ability to obtain loans.

Therefore it can pay to take out insurance cover which protects against just such an unfortunate eventuality, as opposed to some very broad policies which can cover a wider variety of debts. This type of cover may be too expensive or simply too detailed for someone who is most concerned about a credit card debt.

When searching for such a policy, the typical UK consumer is arguably spoilt for choice. Many banking and insurance providers will happily furnish you with card cover, and the market is a competitive one. A typical policy will pay the card provider a portion of your outstanding balance for every month that you are without an income through no fault of your own. How high this portion is will depend on your policy or provider. You can typically expect around five to ten per cent of your balance to be paid off via the cover. So if you owe £1,100 on a card, in the first month of payments an insurer would pay £110 of it off on a 10 per cent cover policy. Note the amount you will be covered for will be limited – if you breach that limit of, say, £10,000 an insurer may not pay out or only pay a certain amount.

When it comes to premiums, some insurers will agree a set regular fee while many will work the costs out depending on what you owe. This will often be done via a fee per debt method. This will mean a firm charging you say, 70p per £100 you owe on the card. So if your balance is £1,600 your premium that month will cost £11.20p.

When it comes to a claim, you simply contact the insurer who will verifying it before starting payments on your balance, usually after a set time period expires, often around one month after the successful claim.

Credit Card Insurance

Note that not everyone will be able to immediately take out a policy. Most firms place some straightforward restrictions and requirements on who can take out a credit card insurance policy. For example, you will usually need to be between 18 and the statutory retirement age and will also need to be a full UK resident. Often, a company will not provide you with cover if you are off work already with an illness.

When it comes to your job, you will typically need to have held it for at least six months and work a minimum number of hours a week to be excepted. When claiming on a policy on the basis of involuntary redundancy, you must have not known in any way that you were being let go before taking out the cover. Check the small print of the policy to dispel any doubts.

Not all claims on the basis of sickness will be accepted either. Some typical exclusions mean you will not be able to claim if off work through an illness caused by drug or alcohol abuse. A condition which existed before the cover was taken out and suddenly worsens will also not be covered by many insurers.

But why would anyone need credit card insurance when measures and benefits are in place for those who are left without work? For starters statutory sick pay does not last forever and only runs for a maximum of 28 weeks in the UK – not enough for anyone facing a long-term illness.

When it comes to redundancy, an employer must pay one and a half week’s pay for each year of employment with the firm completed by anyone aged over 41 and one week’s redundancy pay for each year for those aged between 22 and 40 who are let go. People under 22 get just half a week’s pay per year.

Turning to benefits – those who manage to successfully claim jobseekers’ allowance can expect little more than £60 per week in many cases – barely enough to cover rent or food bills, let alone deal with card payments.

Finally, it is worth bearing in mind that card protection comes under the wing of the payment protection insurance industry, which is still the subject of an investigation by the Competition Commission. This follows rulings from the Financial Services Authority in 2007 which said some big name companies had ‘mis-sold’ polices to people who did not need them or who did not even qualify for them.

Most of the negative attention was centred on policies which were sold to people by the very same firm providing them with a loan or card, often at the same time as they applied for the product. With this in mind make sure you shop around for a credit card insurance policy which is right for you. Some smaller providers offer better deals than more well-known firms and can provide peace of mind at a much cheaper price.