Credit and debt are BY FAR the topics I receive the most emails about and usually I hear the same queries again and again. But this week a reader asked me a question I hadn't heard before. I always get all geeked out by the chance to learn something new myself and share it with you. Here goes!
Q: I am an army wife with one child and owe $21,000 on my credit card due to losing my job and relocating a couple of times to different states which in itself has caused financial hardships. When I got my credit card, the credit card company told me, due to the economy, it would be wise of me to purchase credit card protection to cover my credit card debt if I lost my job, so I purchased it. I lost my job, and the credit card company said they are responsible for half and I would have to pay the rest. Can the credit card company, renege on its promise to pay off my balance and then only pay half of my bill?
A: I was aware of credit life insurance, which pays off your debt if you die and I had railed against it as recently as my January 31st column. But I had never heard of job loss insurance that pays your credit card bill if you are out of work. Go figure. However, when I don't know the answers I at least know who to ask: in this case, my buddy Todd Mark, Vice President of Education for Consumer Credit Counseling Service of Greater Dallas. Todd wrote back, "It exists. Would I recommend it is another question. I would rather self-insure by having emergency savings to get you through a layoff or other event. Plus, that money can be used to pay down the debt, rather than paying premiums for insurance which won't often get used."
As to the reader's question about whether the insurance company has the right to pay just half of her bills, that is most certainly spelled out in the fine print of the insurance contract. I suspect that she was told verbally that the credit insurance would "cover her" if she lost her job, but that the written contract only promises 50% coverage. My advice is simple: never pay for a financial product without reading and understanding the contract first.
Meanwhile, here's more information for anyone else considering purchasing credit insurance in case of a job loss. The Federal Trade Commission, the nation's consumer watchdog, provides a helpful list of questions to ask before paying for this type of coverage:
• How much is the premium?
• Will the premium be financed as part of the loan? If so, it will increase your loan amount and you'll pay additional interest, and more for points (if points are on your loan)?
• Can you pay monthly instead of financing the entire premium as part of your loan?
• How much lower would your monthly loan payment be without the credit insurance?
• Will the insurance cover the full length of your loan and the full loan amount?
• What are the limits and exclusions on payment of benefits - that is, spell out exactly what's covered and what's not.
• Is there a waiting period before the coverage becomes effective?
• If you have a co-borrower, what coverage does he or she have and at what cost?
• Can you cancel the insurance? If so, what kind of refund is available?
The FTC also warns that it is illegal for lenders to include any type of credit insurance in your loan without your knowledge and consent. To read the FTC's entire brochure about credit insurance, click here.