A payment protection plan is a form of insurance for your credit card, and it sounds tantalizing: in the event of hardship you can use it to pause minimum monthly payments for months on end, avoiding extra fees and leaving your credit score untouched. But is it worth the monthly fee it costs to sign up for it?
What is a payment protection plan?
Payment protection (aka “credit card protection insurance,” “credit shield,” or “credit safeguard”) is an add-on service that typically costs you a few bucks in monthly fees, with the amount based on a small percentage of your overall balance. The service will pause payments (usually for up to 18 months) if a “triggering event” leads to unemployment or disability. Additionally, some payment protection plans will cancel credit card balances owed in the event of death. So far so good, right?
The downside
Qualifying for payment protection isn’t straightforward even if you choose to pay for it in advance of experiencing a hardship, as many plans have a long list of conditions and exclusions buried in the fine print. A GAO report found that 24% of benefit claims were denied and that more than half of those denials were due to the cardholder’s inability to provide adequate documentation. This lack of transparency attracted the scrutiny of regulators in 2012, leading some major banks to ditch the product altogether (which also might explain why it’s currently marketed under so many different names).
The following is a list of reasons why you might not be able to claim full benefits or otherwise get the most out of your claim, according to Investopedia :
You have a preexisting health condition.
If you’re a seasonal worker, or a part-time worker, or self-employed, you might not qualify for unemployment benefits.
You hit a limit on the number of triggering events per year.
There might be caps on bigger payouts like debt cancellation.
You might need to be employed a few months prior to enrolling to qualify.
Inadequate documentation (as defined by your insurer) to prove your disability, job loss, or other condition exists.
You might have to be disabled for any job you’re qualified for, not just the job you have.
The list of loopholes goes on. You really have to read every detail of the policy carefully—and even if you think you’re going in with your eyes open, the interpretation of the terms can be a battle between you and your lender.
The bottom line
Payment protection plans offer limited benefits that typically only suspend your minimum payments and interest accrual for a short period of time, and these benefits may not cover all emergency situations. The money spent on monthly fees could instead be spent on life or disability insurance that will offer better coverage. Another option is to build up an emergency fund in anticipation of potential hardship down the road. Better yet, during the pandemic many credit cards are already offering forbearance programs; all you need to do is contact them directly to claim a hardship. After all, why pay for something you can get for free?