What is credit card insurance?
Most people might associate the phrase credit card insurance with some kind of cover which guards against theft or fraud. But policies are also available which cover someone’s ability to stay in touch with the monthly repayments even if their circumstances change for the worse rather suddenly. For example, someone with a perfect record of being able to pay the bills might suddenly find they struggle if they lose their income unexpectedly. They might find themselves out of work for a short while due to a serious illness, accident or unwanted notice of redundancy. Once severance payments or sick pay runs out, the person can face credit rating problems and even legal implications. Some forms of credit card insurance will step in and help someone keep up with a debt before any of this happens.
This type of credit card insurance is known as payment protection insurance (PPI). It is designed specifically to help someone if they fall into trouble through no fault of their own after losing their income. It will pay a portion of someone’s outstanding card balance for a period until they find alternative employment or get better and return to their job. The normal type of policy will require a straightforward premium and in exchange will pay a percentage of someone’s outstanding balance each month after they make a claim. What percentage will normally be decided when the policy is taken out. A typical figure might be 10 per cent of the remaining balance each month.
Premiums will either be charged as one lump sum or calculated according to how much debt is left on the card. So for example an insurer might charge 75p per £100 of debt on a card meaning the cost of the insurance will vary. After a successful claim has been made, the insurer will simply directly pay off the cash percentage either until the payment period, typically 12 months, expires or until someone is able to carry on paying the bills themselves, whichever comes around sooner.
Most policies carry with them a number of restrictions. The most common and obvious ones are that the policy holder will have to be the named card holder. The person in question will normally need to be between 18 and 65 years of age, and will need to have been in full-time work for a set period, with six months the norm. When it comes to making a claim, redundancy will only be covered if you did not know you were going to be let go before you took out the policy. Another important point is the fact that most insurers will not pay out if someone is out of work due to a pre-existing medical condition - this means an illness they were diagnosed with before they took out the insurance.
Simon Burgess is managing director of payment protection specialists British Insurance, which provide credit card insurance as a standalone provider. He said: “Credit cards are a fact of life for most people and a handy thing to have in many cases. However, they can be a burden during more difficult times and our cover plans can help ease this worry.”
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For many years I have been a staunch campaigner against the major names in finance who, I believe, rip-off their customers by selling over priced, often unsuitable payment protection insurance (PPI) cover.
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