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Credit Card Payment Protection: A Closer Look

Quick Facts

Payment Protection at a Glance

  • "Suspends" your minimum monthly payment when unemployed, disabled or under other "qualifying" circumstances.
  • "Cancels" your credit card balance if you die (assuming it's legal in your state).
  • Effectively raises your interest rate by about 10.5%.
  • Costs around $45 per month on a $5,000 balance.
  • Benefits are denied for many (and often surprising) reasons.
  • You don't get to see the "fine print" until after you sign up.
  • Always read the fine print carefully! It's available here.

Your credit card company forcefully pitches them at every opportunity. But are payment protection plans worth the money? For nearly every situation, the answer is an emphatic "No."

If you lose your job, payment protection puts your credit card balance on hold for up to two years- no payments and no interest. Most credit protection plans pay off your credit card balance if you die.

It sounds nice until you consider the cost: Effectively a 10.5% increase in your interest rate (or more) until the benefits kick in.

Credit card companies have a laundry list of reasons to deny your claim. They outright refuse to give you the fine print until you sign up.

Payment protection plans are extremely profitable for credit card companies. This means the opposite for you, the consumer. Unless you can turn the odds in your favor, you should walk away from this bet.

What is payment protection exactly? Is it right for you? Do you qualify for the benefits? What will it cost you?

Find all of this and more in Knowzy's "Credit Card Payment Protection Plans: A Closer Look."

 

 

Contents

 

What is Payment Protection?

Credit card companies offer payment protection plans (sometimes called "credit protection") to help you out in times of financial trouble.

They "freeze" your credit cards in time for up to two years: No payments, no interest and no payment protection charges.

Some plans also pay off your balance if you die (in states where it's legal).

You are charged a monthly fee for payment protection based on your credit card balance. The fee is typically equivalent to a 10.5% rise in your interest rate. That's about $45 per month for a $5,000 balance.

Here are the two main features of payment protection in more detail:

 

"Debt suspension" for qualifying events

While enrolled in payment protection, you won't have to pay your credit card bill under certain circumstances (see list below) for a period of time.

On most plans, this means you won't have to pay your credit card bill and the credit card company puts interest and payment protection fees on hold. When your benefits run out, your credit card balance is the same as when you started.

CapitalOne's payment protection plan is unique: It actually pays your full minimum monthly payment, meaning your balance decreases a little each month.

On a few plans, you cannot use your card while receiving payment protection benefits. Discover's plan gives you a $1,500 credit limit with their approval. Most credit protection plans allow you to keep spending. The policy for each plan is listed in our comparison chart.

"Qualifying events" vary from company to company. Each event requires proof that you qualify and contains reasons for denying your claim. Failing to read the fine print can cost you big!

Here are the most common qualifying events:

  • Involuntary Unemployment (Layoff, union strike, etc.)
  • Temporary Disability
  • Permanent Disability
  • Hospitalization
  • Called to Military Duty
  • Leave of Absence
  • Business Hardship
  • Moving
  • Just Married or Divorced
  • Just Had a Baby or Adopted a Child
  • Retirement
  • Natural Disaster
  • 1 Month "Payment Holiday" (Chase Only)

These benefits last as little as one month and as long as two years. The length of time depends on the qualifying event and the company offering the plan.

 

"Debt cancellation" upon death

Perhaps the most compelling reason to sign up for payment protection is when you're certain you're going to die soon.

The "debt cancellation" feature wipes out your entire credit card balance (up to $25,000).

If you qualify, life insurance is more flexible and usually much cheaper. $25,000 in payment protection costs around $220 per month. $50,000 in life insurance for a 54-year-old smoking male is around $75 per month. Double the payout for less than half the price and your heirs can spend it on anything, not just credit card debt.

Finally, beware: At least nine states consider debt cancellation a life insurance policy. It is illegal for credit card companies to offer this benefit if you live in one of these states. The company is required to notify you if that is the case but the best policy is to ask first.

 

 

Reasons Your Claim Might Be Denied

Credit card companies can deny your benefits for a number of reasons. It's important to read the fine print carefully to ensure you are not wasting your money.

Although, they refuse to give you the fine print until you sign up, Knowzy is making the full legal terms and conditions available online.

Below are a number of reasons credit card companies may deny your claim:

 

  • Self-employed: You typically do not qualify for involuntary unemployment benefits if your income comes from your own business. You can still claim the other payment protection benefits, like disability and debt cancellation. Chase (and possibly other companies) offers payment protection at a reduced rate if you forego the involuntary unemployment benefits.
  • Not working full time: In order to claim unemployment benefits, you must have been working full time when you lost your job. Most plans define "full time" as 30 hours per week or 15 for full-time students. CapitalOne doesn't define full time or part time, they merely state that you must have been working full time.
  • You don't qualify for unemployment benefits: You are required to show proof that you are unemployed. The key piece of evidence comes from your state unemployment office. If you don't qualify for unemployment, the credit card company usually denies your claim.
  • You didn't sign up with an employment agency: Many payment protection plans expect you join an employment agency and require proof of it. Your benefits may depend on it.
  • Quit your job or forced boss to fire you: Payment protection only covers involuntary unemployment. You cannot throw a copy machine out a third story window, get fired and expect cash in on payment protection. The terms of service exclude "willful or criminal misconduct."
  • You haven't been working long enough: If you just started a job and you're worried it won't last, don't look to credit protection to bail you out. You usually need at 30 days of employment with the same company (90 for Chase). You also usually can't file a claim in the first 30 days of payment protection.
  • You file for bankruptcy: Most payment protection plans will deny you benefits if you go bankrupt. CapitalOne and Bank of America seem to be the only ones that don't have this policy.
  • Late payment or over credit limit: Some plans won't provide benefits if you are over your credit limit. Chase can deny benefits if you are late on your monthly payment. The rest will deny your benefits if your account is seriously delinquent (90 or 120 days behind).
  • Pre-existing conditions (disability claims): It's a dirty term in the heath insurance industry and it's a dirty term here too. Payment protection will not cover claims for medical conditions diagnosed before you signed up.
  • Join a debt management program: If you decide it's time to pay down that credit card bill and sign up for a debt management program, Chase and Bank of America may kick you off payment protection. The other credit card companies don't seem to have a problem with it, though.
  • Insufficient proof of claim: You must prove your claim is legitimate to the credit card company's satisfaction. If you're collecting benefits for many months, you'll have to prove it again and again. If they deny your claim for lack of evidence, you can't appeal to the insurance commissioner; you must sue your credit card company.
  • Death by terrorism or war: If, tragically, you die as a result of terrorist act or an act of war, don't look to your payment protection plan to forgive your credit card balance. Most plans exclude these causes of death.

 

 

Possible Reasons for Signing Up for Payment Protection

For the vast majority of Americans payment protection is simply a waste of money. There are, however, a few situations when you might come out ahead with a payment protection plan.

It's important that you consider your situation carefully against these scenarios. Credit card companies can deny your claim for many reasons. The plans are so expensive that staying on them too long is usually a money-losing proposition.

The following scenarios may lead to a positive payment protection experience:

 

Reason #1: You're going to die soon and have a large balance.

The biggest payout from these plans occurs upon your death: Payment protection plans cancel your entire credit card balance (up to $25,000, see chart). "Debt cancellation" is the technical name for this benefit.

You have our condolences if your situation fits Reason #1. But before you run out and sign up for payment protection, consider these points:

 

  • Life insurance is usually a fraction of the price

    Before you buy payment protection for debt cancellation, get a quote for life insurance in the same amount or more. If you qualify for it, life insurance is usually much cheaper and your heirs can spend it on more than just your credit card debt.

     

  • Illegal in 9 states

    Credit card companies can't sell debt cancellation plans in states that consider it life insurance. Regulations would force them to make these plans more generous if they sold debt cancellation as insurance.

    If you live in AK, IA, MT, NV, OR, RI, TN, WA or WI (and possibly more states), credit card companies can't legally offer debt cancellation in its current form.Before signing up, be sure to ask if you are in a state that prohibits the credit card company from offering debt cancellation upon your death. Credit card companies are happy to sign you up for payment protection, at the same price, even when state law prohibits them from offering what you're really looking for.

     

  • Could be denied for "Extraordinary Use" before your death

    If you sign up, run up a bunch of charges and die soon after, they may not cover you after all. Discover reserves the right to deny or revoke your balance cancellation if they "discover extraordinary use of your account prior to your death."

     

  • Can you afford it?

    The maximum benefit on many plans is $25,000. If you actually had a $25,000 balance, you would be paying $222.50 per month on the average plan.

    The monthly bill for payment protection shows up as a charge on your credit card. If exceed your credit limit or make a late payment, you may lose your coverage.

    Make sure paying for payment protection doesn't prevent you from using it when you really need it.

    See how much it will cost you with our payment protection fee calculator.

     

Reason #2: Layoff is imminent and carrying a large balance.

This is a tricky call at best. It only makes sense if the job loss is coming in the next few months and you are certain your credit card company won't deny your claim.

Josh Smith at WalletPop claimed payment protection might be a good hedge against an upcoming layoff. Commenters on his article universally disagreed, recounting horror stories of paying for payment protection only to be denied when they filed a claim.

On one hand, if you don't think you can make your minimum monthly payments when you lose your job, payment protection can keep you out of trouble and free up some cash when you need it most.

On the other hand, you will pay dearly while you're waiting to lose your job- money you could set aside for future minimum monthly payments or use to pay down your balance.

Here are some points to consider:

 

  • Other benefits may cover your credit card payments

    You may have other ways of keeping up with your minimum monthly payment when you lose your job. First, you'll likely receive unemployment checks (if you don't qualify for unemployment, you typically don't qualify for payment protection benefits anyway). Your employer may offer a severance package. You may collect unused vacation time. There's no need to pay for payment protection if you can get by without it.

     

  • How long before your layoff? When do you expect to return to work?

    As a rule of thumb, three payment protection fees equal one minimum monthly payment (find the precise ratio for your situation with our calculator). Your interest rate effectively goes up 10.5% or more while you're paying for payment protection.

    Is handing over all this money to the credit card companies month after month really going to benefit you when the layoff finally happens? What happens when you return to the workforce?

    Unless you're certain the layoff is coming in the next few months, you're probably better off waiting until you have a more solid timeline. If you expect to return to the workforce within a few months of your layoff, you might be better off putting aside a few months of credit card payments.

     

  • Will you need to use your credit card when you're unemployed?

    Check the rules of the payment protection plan you're considering: Some prohibit or limit the use of your credit card while the plan is active. If you're counting on that line of credit when you're unemployed, payment protection isn't for you.

     

  • Late payments, over credit limit could result in loss of payment protection

    If you miss payments or exceed your credit limit, your payment protection plan could be suspended. All that money you paid waiting for the layoff will be for nothing when you finally need it.

    Your payment protection fees could be the very charges that put you over your credit limit.

    You will likely need to make at least one payment after you lose your job. Most plans require at least 30 days of unemployment before you can claim your benefits (15 days for Discover).

    Make sure you are not at risk of getting behind on your payments or going over your credit limit before you decide to sign up for payment protection.

     

  • Your benefits might be denied

    After all the money you spent, all the faith you put in the payment protection plan, the credit card company may tell you, "Sorry, you don't qualify." Don't let this happen to you. See what might disqualify you in our "Reasons Your Claim Might Be Denied" section and read the terms and conditions of your plan carefully.

     

Reason #3: "Life Events:" Retirement, Marriage, Birth, Call to Active Duty, etc.

Some plans offer benefits for so-called "life events." You have the advantage in these situations because you can predict when you are going to file the claim.

In this strategy, you can sign up for payment protection just before one of the events below, put your balance on hold and cancel the plan just after you stop receiving benefits. The goal is to make no more than two protection plan payments.

Life events are usually short-term benefits, from one to four months. Not all payment protection plans cover all of the benefits below. Review your plan carefully to make sure your life event is covered.

Be prepared to prove you that you qualify for the benefits. The credit card company requires a note from your employer, a legal document or other evidence in order to qualify. The terms and conditions spell out what you will need to provide.

The events include:

  • Leave of absence (6 to 24 months)
  • Retirement (1 to 4 months)
  • Marriage (1 to 4 months)
  • Divorce (1 to 4 months)
  • Birth or adoption (1 to 4 months)
  • Reserve or Guard called to active duty (up to 2 years)
  • Moving (1 to 4 months)
  • Graduation
  • New job or promotion (1 to 4 months)

 

 

Payment Protection by the Numbers

We know that credit card payment protection plans are expensive and the credit card companies keep most of the fees they collect. Here we break down these numbers and provide a calculator to show exactly how much payment protection would cost you.

 

How Much Does Payment Protection Cost?

Credit card companies typically charge $0.89 per month for every $100 in balance you are carrying. On a $5,000 balance, that's $44.50 per month or $534 per year.

The fees show up as a charge on your credit card, so it's easy to lose sight of just how much payment protection costs.

Don't forget the "hidden" surcharge: Payment protection fees accumulate interest if not paid off immediately. $534 works out to an additional $106.80 per year at a 20% interest rate.

Does it make sense to pay $45 per month to avoid making a minimum monthly payment of roughly $135 at some point in the future? The math speaks for itself: Unless it's the very near future, probably not.

 

How Much Will Payment Protection Cost You?

This handy calculator makes it easy to figure you how much payment protection would cost you. Just put in your balance, the amount your credit card company charges per $100 and it does the rest.

See our comparison chart if you are unsure how much payment protection costs through your credit card company.

 

Calculate Monthly Payment Protection Fees
Credit Card BalanceAmount per $100 Payment Protection Per Month
?

 

More Numbers

  • 5%: Percentage of payment protection fees paid out as benefits, according to the Center for Economic Justice's 2003 report. It calls this a "conservative estimate."
  • 40%: Percentage of fees paid out under credit insurance, a nearly identical product regulated by state and federal insurance laws.
  • $220: Monthly cost to insure $25,000 in credit card debt with payment protection. The debt is "canceled" the balance upon death.
  • $75: Monthly cost for $50,000 in life insurance for a 54-year-old smoking male. Much, much cheaper for the young and healthy.
  • 10.5%: Cost of payment protection, expressed as an annual percentage rate (APR), based on $0.89 per $100.
  • 33%: Payment protection charges amount to roughly one-third of your minimum monthly payment (when carrying a balance).

 

 

Comparison of Payment Protection Plans

We've compiled a list of the payment protection plans offered by US credit card companies.

You'll find more than just the cost. Also included are the important terms, how long coverage lasts and a link to the complete terms and conditions, where available.

We have not found all of the programs. Please let us know of any that we missed.

 

Payment Protection Plan Comparison
Company and Plan Name Cost per $100Pay or SuspendDays Before ClaimDays UnemployedMaximum Term (Months)Use Card?Maximum Death BenefitWeb PageTerms and Conditions
Bank of America Credit Protection Plus95¢Suspend603018Yes$25,000GoWord Doc. (4MB), Text
CapitalOne Payment Protection99¢Pay03012Yes$10,000GoWord Doc. (14MB), Text
Chase Payment Protector89¢Suspend30024Yes$25,000GoWord Doc. (16MB), Text
Citibank Payment Protector85¢Suspend0?24No$10,000GoNot available. Share your copy.
Citibank PaymentAid Plus89¢1Pay03012Yes$10,000GoNot available. Share your copy.
Credit One Credit Protection Program96¢Suspend30306No$10,000GoNot available. Share your copy.
Discover Payment Protection89¢Suspend01524Up to $1,500 with approval$25,000GoWord Doc. (4MB), Text
First Premier Credit Protection89¢Suspend30306No$5,000GoNot available. Share your copy.
First National of Omaha SecureCredit89¢Pay903024Yes$10,000GoNot available. Share your copy.

Footnotes

1  Plus an additional $3.29 per month for a mandatory "add-on" which includes a credit monitoring service and LifeWorks, a service offering referrals and advice on a wide range of topics, including improving your computer skills, parenting, estate planning and going back to school. This add-on is not optional.

 

Legend

Cost per $100  You pay for payment protection monthly based on every $100 in credit card debt you are carrying. For example, if a credit card company charges $0.89 per $100 and you have a $1,000 balance, you would owe $8.90 for the month. Use our credit protection calculator to determine exactly what your monthly payment protection fee would be if you signed up.

Pay or Suspend  "Pay" is better than "suspend." Pay is also rare. In both cases, you don't need to make your minimum monthly payment. "Pay" means the payment protection plan pays your credit card's minimum monthly payment, covering interest and a small amount of principal. "Suspend" means your interest charge is waived and your monthly payment is deferred. Unlike "pay," suspension doesn't pay down your balance.

Days Before Claim  The number of days before you can collect benefits if you become unemployed. For example, on Bank of America's plan, if you sign up for credit protection and lose your job 14 days later, your involuntary unemployment benefits won't kick in for another 46 days.

Days Unemployed  The number of days you need to be out of work before you can file an involuntary unemployment claim. On most plans, you can't activate credit protection the same day you lose your job- you need to be out of work for a full 30 days.

Maximum Term (Months)  The total number of months you can claim unemployment or permanent disability benefits. At some point, you are cut off from payment protection benefits, after which you need to start making your minimum monthly payments or face the consequences.

Use Card?  "Yes" means you can continue using your card while receiving payment protection benefits.

Maximum Death Benefit  The "debt cancellation" feature of payment protection pays off your credit card balance if you die up to the amount listed in this column.

Web Page  Click the "Go" link to visit the marketing or sign up page for the payment protection plan.

Terms and Conditions  The complete "fine print" for the payment protection plan. The "Word Doc" link contains the photo-scanned copy of the terms and conditions. It is quite a large file and requires Microsoft Word or a program that can read Word documents. The "Text" link has only the text of the terms and conditions. It may contain errors and the formatting may be a little odd.

Figures last verified September 1, 2009

 

 

No "Terms of Service" Until You Sign Up

Among the most astonishing things Knowzy discovered: Credit card companies will not give you the "fine print" until after you are enrolled in payment protection. Worry not, though, we've obtained them and are reprinting them below.

Can you imagine: You are accepting a legally binding contract but they will not show the contract you are agreeing to? This is clearly a "red flag."

Knowzy contacted Chase, CapitalOne, Discover and Bank of America requesting the terms and conditions for their respective payment protection plans. After spending over two hours on the phone, pressing the reps and their supervisors for the legal terms of the contract, none would agree to provide it prior to signing up.

The banks claim you have a 30-day "review period," where you can read the terms. If you don't agree to them, cancel in the first 30 days and they will refund any charges.

However, the charges appear on your next statement closing date, which is almost certainly less than 30 days. You will incur interest on this charge if you are carrying a balance. Both Chase and CapitalOne acknowledge the interest charge may be non-refundable, even if you get a refund for the payment protection charge.

To top it off: The 30 day period begins when you call but it took 7 to 11 days to receive the materials from the banks Knowzy signed up with. The review period, it turns out, is actually much shorter than 30 days.

Can you trust a company that flat out refuses to disclose important details that could cost you a great deal of money?

Since the credit card companies will not give you the details you need to make an informed decision, Knowzy is doing it for them. Here are the complete payment protection terms and conditions from the major credit card companies:

 

 

Payment Protection is Not Insurance

Payment protection is nearly identical in function to a similar product, credit insurance. The big differences:

  • Payment protection costs more money
  • Credit insurance makes the minimum monthly payments to your account, paying down your balance a little each month. While CapitalOne's payment protection plan carries on this tradition, others simply "suspend" or "defer" your payments. This means you don't have to make your monthly payment and they forgive your interest charges but your balance remains the same at the end of your benefit period.
  • Payment protection contains more restrictions that credit insurance that could prevent you from collecting benefits.
  • State and federal insurance regulations don't apply to payment protection plans.

Credit card companies used to offer credit insurance to their customers through insurance companies. Consumer groups generally considered these insurance policies a poor value. In 1990, for example, the Consumer Federation of America called credit life insurance the "nation's worst insurance rip-off."

Around 2001, insuring your credit card debt got even worse.

Credit card companies concocted a scheme to offer their own product- Payment Protection. They can charge even more money, cut out the insurance company middleman and not worry about those pesky insurance regulations.

The Center for Economic Justice (CEJ), a non-profit consumer advocacy organization, prepared a detailed comparison between credit insurance and payment protection in July 2003. Here are some of the findings:

  • They keep more of your money. Under credit insurance, companies paid out 40% of the premiums collected as benefits. Under payment protection, the CEJ "conservatively" estimates credit card companies pay 5% of the fees they collect.
  • You pay more money. The cost of payment protection is 25% higher than credit insurance.
  • No legal limit to how much credit card companies can charge. Insurance companies are governed by "loss ratios" whereby they must pay out anywhere between 40% and 70% of the premiums they collect. If an insurance company collects too much, they must refund the money to policyholders. None of this applies to payment protection.
  • It could be cheaper than credit insurance. Significantly lower administration costs mean credit card companies could offer payment protection for less money than credit insurance. Of course, the opposite is true.
  • Fewer consumer protections. As insurance, you can file grievances with your state insurance commissioner. As payment protection, you must sue the credit card company if you feel they treated you unfairly.
  • Different wording helped make it legal. Payment protection is nearly identical to credit insurance in practice. However, the terminology credit card companies use helped to change regulated credit insurance into unregulated payment protection. Here are some examples:
    • "Filing a claim" became "activating protection."
    • "Pay" became "cancel" or "waive," as in, upon death, your outstanding balance is canceled.
    • "Life insurance" became "death protection."
    • "Benefit" became "feature" or "protection."

 

 

Talk About It

Do you have an experience with credit protection you'd like to share? Has payment protection helped you? Has it let you down?

Share you payment protection stories on our Credit Card Feedback page.

If you have questions about payment protection plans, please let us know. When we find an answer, we share it with you and future visitors wondering the same thing.

 

Originally Published:  Wednesday, September 2, 2009, 5:00 PM PT

Last Updated:  Tuesday, August 30, 2011, 5:21 PM PT

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