Most credit cards now come with the option of consumer credit insurance, which will cover your repayments if you become unemployed or disabled. But is it worth it?
How much do you owe on your credit card? $1,000? $2,000? According to the Reserve Bank of Australia, the average Australian owes around $3,100. If you're thinking 'I don't owe anywhere near that much...', consider then that on average, that means someone somewhere else owes a lot more.
So what would happen if you were injured and unable to work? Or if you lost your job? How would you make the repayments?
Many financial institutions now offer optional consumer credit insurance (CCI) with their credit cards, which can be taken out during the card application process. If the cardholder becomes unemployed, disabled or dies, the CCI will cover part or all of the card repayments, up to a set limit.
You may have noticed there were a lot of caveats in that last sentence. We said 'partial repayments', 'may cover...' and 'up to a set limit'. That's because, like all insurance, it can be a tangled web of complex terms and conditions.
The Australian Securities and Investment Commission cautions borrowers about CCI and emphasises the need to understand the policy before agreeing to it. Many borrowers go to the financial institution with the intention of getting a credit card - not insurance. When it's offered as part of the application process, it sounds like a good idea. But the process doesn't really allow the borrower sufficient time to shop around for other insurance deals, read and understand the policy document or to ask questions.
Like
credit card travel insurance, CCI is often a one-size-fits-all-approach and it may not suit your needs. For example, you may be a seasonal or contract worker and this type of employment may not be covered by the policy. Or you may already be receiving sufficient coverage via the insurance on your superannuation fund.
Also, the definition of a sickness which prevents you from working may differ from your understanding or the policy may exclude 'pre-existing conditions'.
CCI products offered during the application process can also be more expensive than other options. In 2004, ASIC reported that CCI policies were 2 to 4 times more expensive than the term life policy.
Remember to shop around before you agree to any coverage and if you change your mind, you can choose to cancel your policy at any time.
