7 reasons not to buy payment protection

Pen on loan application papers

Lenders are taking advantage of the troubled economy to push programs that cancel or defer credit card payments if you are laid off, disabled or die.

They talk about being prepared for the unexpected, removing one of your worries and helping you get through troubled financial times.

Payment protection sounds like a sweet deal.

But it's not. Lots of rules in the fine print make it difficult to collect the meager benefits they offer.

Credit card companies used to provide insurance through companies that would pay all or part of your balance under certain conditions.

Although those policies were more costly than other types of insurance, state insurance regulations and oversight held them somewhat in line.

Now most major card issuers -- including Citicorp, Discover, Bank of America, Advanta and Chase -- have switched to so-called debt cancellation or debt suspension programs.

They aren't considered to be insurance, so they aren't regulated by state insurance commissioners. They cost a lot more and pay out far less.

The Center for Economic Justice estimates that $800 million in credit card insurance claims were paid from $2 billion in premiums in 2003, the most recent year available for those numbers.

In other words, companies kept 60% of the insurance premiums they collected.

The survey found cardholders paid an estimated $2.5 billion in debt cancellation or suspension fees, but received only $125 million worth of benefits.

The lenders kept 95% of the money they collected.

As a result, credit card companies are eager to sell these highly profitable products -- so eager that you might get signed up without your consent.

Unlike with insurance, you don't have to sign anything. A verbal OK is enough, so think twice before answering yes to a question from your credit card company about whether you'd like to "protect your credit score" if you become ill or get laid off.

The sales pitch describes the best-case scenario. But the fine print spells out restrictions, exclusions, limitations and requirements, making it hard for consumers to figure out what they really are getting and how much it costs.

Before you enroll in one of these programs, here are 7 reasons to just say "no."

Reason 1. You can obtain better coverage for less money in other ways.

Debt cancellation, debt suspension and credit card insurance cost a lot more than regular term life or disability insurance. The only time one of these programs makes sense is when you can't obtain broader insurance coverage.

Regular insurance can be used for any purpose, including paying off credit card balances.

If you already have insurance, you don't need this very expensive, very restrictive additional coverage.

Reason 2. There are lots of conditions to qualify for benefits.

Most programs require you to be disabled or unemployed for 90 days before filing a claim.

The coverage is often denied if you've missed any payments or exceeded your credit limit.

Debt cancellation and suspension programs typically limit death benefits to accidental death, which represents only about 5% of claims.

For unemployment claims, you typically have to have worked full-time before losing your job and be completely unemployed (no part-time work).

You'll have to submit lots of documentation to prove that you qualify for the benefits you're claiming.

To file an unemployment claim, you must provide paperwork showing that you were laid off, how long you were employed and how many hours you worked each week.

For disability claims, you have to provide doctors' reports and medical tests that show you can no longer work.

Reason 3. Once you qualify, the benefits are meager.

Debt cancellation only means you don't have to make your minimum monthly payment.

It waives the interest you would pay on your balance, usually about half of the minimum payment. In addition, your balance is reduced by the principal paid off by the minimum payment. That isn't much, because the minimum monthly payment is usually only 2% to 4% of the balance.

Debt suspension or debt freeze is stingier. You don't have to make your minimum payment, but only the monthly interest is waived. Your outstanding balance remains the same.

Reason 4. Benefits are squeezed in other ways, too.

Most programs limit payments to a certain period of time or a maximum dollar amount, such as $5,000, whichever comes first.

There's usually an age limit for obtaining life and disability benefits. If you're too old, you don't get paid.

Reason 5. Charges made by other cardholders may not be covered.

Some programs calculate benefits based only on the charges you personally made, not those made by a spouse or child, if you don't have joint coverage.

Reason 6. You might lose use of your credit card while you are collecting benefits.

Some programs don't allow new charges to your card while the debt cancellation or suspension benefits are in effect.

If you're unemployed or disabled, your credit line could be crucial for making ends meet until you find work or get back on your feet. For that reason, many cardholders decide not to activate benefits even though they've paid for them.

Reason 7. These programs cost a lot compared with the benefits they pay.

The monthly fee for debt cancellation or suspension programs ranges from 50 cents to $2 for each $100 of your monthly ending balance. At $1 per $100 of balance, the monthly fee for a $2,000 balance is $20.

If you're 40 years old, you can get $500,000 -- or more -- in term life insurance for that.

The fee is added to your balance, so you pay interest on it as well.

And finally, this protection covers a single card, not all of your credit cards.

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