Is credit card balance protection insurance worthwhile?

This article has been updated from a previous version.

If you’ve had a credit card for a while, you’ve probably been offered balance protection insurance before. The sales pitch goes a little something like this: For a low fee, your credit card issuer will cover your outstanding balance if you run into a financial emergency, such as a job loss or a significant injury.

While this type of insurance may sound good on paper, credit balance protection isn’t as good as it claims to be. Here’s why.

What is balance protection insurance?

Debt repayment can be challenging, especially when you hit a financial roadblock. If you’ve lost your job, you’re unable to work due to sickness or injury, balanced protection is supposed to act as an added layer of financial protection.

It is meant to help you pay down or pay off your balance at a time when it might be most challenging for you to do so.

Balance protection, also known as credit card balance insurance, works like most types of insurance – you pay premiums in exchange for coverage. The amount of your premiums is based on the size of your credit card balance. The bigger your balance, the higher your premiums.

Banks often offer balance protection insurance when you apply for a credit card, activate your credit, or make changes to your card—such as requesting a credit limit increase.

Related: Is debt consolidation right for you?

When does balance protection come into play?

Balance protection insurance is meant to provide financial support during challenging times.

For instance, if you lose your job, balance insurance typically pays a percentage of your credit card balance. Usually, this is 10% to 20% of your balance. The benefits can last for 5 to 10 months or until you reach a maximum amount.

If you become critically ill or pass away, balance insurance may pay off your entire balance or up to a maximum amount. These benefits apply to the balance you owed on your card at the time of the event (death, illness, etc.).

Remember, however, that purchases made after the event won’t be covered. Moreover, it’s up to you to make sure that the insurance meets your specific protection requirements because balance protection can be quite expensive. Consider factors like your financial situation, health, and employment status.

Related: How are credit card interest rates decided?

Where balance protection falls short

If you're on the fence about balance protection because you don’t want to pay the premiums, make sure to read the small print. This way you’ll understand what kind of restrictions, limitations and exclusions there are on the coverage.

While you might be covered for death or critical injury, for instance, you might have to pay higher premiums for additional coverage if you become disabled.

Another important thing to check is the amount you’re covered for. Many credit card issuers only cover your minimum balance. While this will help keep your credit rating intact, you’ll still accrue costly interest while your balance remains outstanding.

That means you could end up paying hundreds of dollars in interest for your coverage over your lifetime for only two percent of your balance, or $20, whichever is higher. Talk about a cash grab!

Just like mortgage life insurance, balance protection isn’t very flexible. You can only pay off your outstanding credit card balance (it won’t help with your mortgage or funeral costs).

Are there any alternatives?

Balance protection insurance might sound useful, but most Canadians don’t really need it.

For one thing, if you already have insurance from another policy, credit card balance insurance might not be necessary.

Compare the coverage and cost with other options like term life insurance, disability insurance, or your employer’s plan.

In many cases, a far better alternative to balance protection is disability insurance. Many employers offer group disability coverage at no extra cost to employees. All you have to do is stay actively employed, and you’re covered.

As with balance protection, read the fine print of your disability coverage to make it’s sufficient. You might consider buying individual disability insurance if your group policy isn’t enough.

Before signing up for any insurance, including balance protection, take the time to assess your unique financial situation. Consider your existing coverage, evaluate alternatives, and read the fine print, so that you don't end up paying for an expensive and unnecessary product.

If you’re struggling with credit card debt, you may also find more favourable terms with a low-interest credit card to keep your balance from ballooning.