Credit Card Insurance: Why Balance Protection Insurance Doesn't Make Sense

Nothing is certain except death and taxes, Benjamin Franklin once said. But you can add insurance to that list as well. Because there’s no escaping it: Whether you own a home, a car, valuables or have a family – chances are you have a few insurance products. But do you have credit card balance protection insurance?

At Money.ca, we believe credit balance protection insurance is the latter. We’ll not only dig into why we believe that and also offer some other, potentially more suitable alternatives.

What is credit card balance protection insurance?

So, what is credit card balance protection insurance? It’s optional insurance that offers coverage to help you pay off your credit card balance if you were to lose your job, are hospitalized, become injured or disabled or die. Now that that’s out of the way, we’ll break down how it works and help you decide if it’s right for you. 

The math of credit card balance protection insurance

^{How it works:}

Credit card balance protection insurance typically charges a percentage of your outstanding balance each month, usually around $1.00 to $1.20 per $100.

^Calculation:

Let’s break it down. For our purposes, we’ll assume a cost of $1 per $100 and a balance of $3,000. 

The monthly cost of credit card balance insurance would be:

• $3,000 ÷ 100 = 30
• 30 × $1.00 = $30 per month

So, on a $3,000 balance, you'd be paying $30/month for balance protection insurance. 

^{Annual cost:}

That’s $360 per year, a hefty chunk of change for a little assurance that your credit card balance will be taken care of in the event something prohibits you from taking care of that bill. 

Another way to look at it is like this: Even if, for some unforeseen circumstance, you struggle to pay your credit card off, you can continue to make the minimum payments (which can be as low as $10 per month) until you can. 

While we don’t recommend that strategy, it’s something to consider before adding yet another monthly expense in the form of credit card balance protection. 

So, the cost definitely adds up over time and may not offer enough benefits to justify the expense, especially considering other financial protection options, such as savings or life insurance, that may be more cost-effective.

A breakdown of the costs by bank

Where does that credit card insurance money go?

If you find yourself in a situation where you need to make a credit card balance protection insurance claim, that money goes directly to your credit card issuer. And only the amount that you owe is paid; you don’t receive any extra funds to help out with other expenses. 

So, if you’re in a serious accident or are diagnosed with a life altering condition, your finances will likely be in bigger jeopardy. To get more protection than credit card balance insurance provides, there are options like disability insurance, critical illness insurance and term-life insurance. More on those below.

The credit card solution if you’re in debt

If you’re having trouble managing debt – or predict you might in the future – there are some credit alternatives you might want to consider. 

Balance transfer credit cards allow you to move the balance from one card to another, lowering your interest rate. We’ve put together a list of some of the best balance transfer credit cards in Canada1, so the research is done for you already. The Scotiabank Value Visa card, for example, offers a 0% introductory interest rate on balance transfers for the first 10 months (increasing to 13.99% after that). There’s an annual fee of $29 but it’s free for the first year, making it a great short-term solution to manage your credit card balance in the event of an emergency. 

Another option is low interest credit cards2. The MBNA True Line Gold Mastercard might be a mouthful to say, but it’s got a low interest rate of 10.00% and an annual fee of just $39. Again, another alternative to paying for credit card balance insurance. 

And, if you’ve got a history of mishandling credit – it’s OK, don’t feel guilty: Focus on improving your financial habits and minimizing the negative impact it can have on your finances – you might want to consider a prepaid or secured credit card. KOHO offers a prepaid card that not only gives you cash back on purchases, it also earns you interest on your balance and can help you build your credit history. To read all about it and other cash back cards, check out our full breakdown of the best prepaid credit cards in Canada3. 

Credit card insurance alternatives

We mentioned credit card balance insurance payouts are given directly to your credit card company in the event of a claim. There are other insurance options that will pay you directly in case of illness or disability, allowing you to decide how to allocate the funds. 

Not only are these options more flexible, but their payouts will likely be higher than the ones for credit card balance insurance.

^{Critical illness insurance}

• What it is: Insurance that will pay you a lump sum in the event of illness, such as cancer, heart attack or stroke
• Cost: Varies by age and health conditions. Can be as little as less than $10 per month
  
• What it covers: May cover cancer, Alzheimer’s disease, heart attack or stroke
  

^{Disability insurance}

• What it is: Protection in the event you can no longer work
• Cost: Between 1-3% of your income, typically
  
• What it covers: Provides coverage in the event of unexpected illness or injury, generally replacing between 60% and 85% of your income
  

^{Term-life insurance}

• What it is: Financial protection, offered for a set period of time, paid out to beneficiaries in the event of your death
• Cost: Generally ranges between $15 and $100 per month
  
• What it covers: Guaranteed payout to the beneficiary in the event of the insured person’s death
  

Can I cancel my credit card balance insurance?

If you have credit card balance insurance, check your policy documents for the specific steps to follow. You’ll likely have to call your insurance company to request cancellation and you might have to provide a written letter. Make sure your insurer provides proof of cancellation in writing. 

The bottom line

So, there you have a hit. A whole list of alternatives that might be more suitable for you than credit card balance insurance. Of course, every person is different and has a different risk tolerance, so make sure to weigh the pros and cons of each before deciding which is right for you. 

FAQs

Barry Choi Contributor

Barry Choi Contributor

Barry Choi is a Toronto-based personal finance and travel expert who makes frequent media appearances. When he's not educating people on how to be smarter with money, he's earning and burning miles and points for luxury travel.

Explore the latest articles

The top 16 best places to retire in Canada

Discover the 16 best places to retire in Canada, considering factors like cost of living, housing, quality of life and access to amenities

SM

Sandra MacGregor

8 pawsome ways to save on pet care costs

AT

Amy Tokic

Is the First-Time Home Buyer Incentive Worth It?

CC

Caitlin Cochrane

Buying a condo in Canada

SC

Sarah Cunnane