There's little justification for balance insurance

The only sane, logical reason for taking out credit card balance insurance is that you want to do your duty as a patriotic Canadian to bolster bank profits.

There's simply no other justification for insuring the unpaid balance on your credit card against circumstances that prevent you from taking care of this debt, say death or serious illness.

The federal Financial Consumer Agency of Canada issued its biannual report on credit cards yesterday and it shows what a nice money maker balance insurance is for the banks and other card issuers.

To insure a continuing balance of $5,000, you could end up paying an astronomical $400 to $700 or more to your card issuer over a 12-month period. You'd be far better off using that money to pay down your card balance.

The FCAC's Credit Cards and You publication (available on-line at http://www.fcac-acfc.gc.ca) shows that the number of credit cards in circulation was up 2 per cent last year to 50.4 million, much less than the 11-per-cent jump in 2002. The number of accounts running a balance was up 6.7 per cent in 2003, which is a tick ahead of the previous year's pace.

Note to the people who are racking up those balances: Pay up if at all possible and forget about balance insurance.

The FCAC says that at least 20 card issuers offer balance insurance, including all of the big banks, alternative banks such as President's Choice Financial and Citizens Bank of Canada, retailers like Canadian Tire, Hudson's Bay and Sears and some gasoline retailers.

The pitch is simple. If you become injured, disabled or lose your job, the minimum payment on your card statement will be made for you until you reach a maximum benefit of $5,000 to $20,000, or you return to work (a 24-month limit may apply).

If you die or become critically ill, your card balance insurance will pay off the amount you owe when you die or get sick. The same dollar maximums apply.

Let us examine the flaws here.

First, you probably don't need balance insurance in the first place. If you have savings or liquid assets, you may be able to keep up with the minimum required payments on your bill for a time.

Balance insurance is also superfluous if you already have a decent amount of life insurance coverage and/or disability or critical illness insurance.

If you don't have your own life or disability or critical illness insurance, either on your own or through work, then give it some thought. The FCAC says that credit balance insurance is usually more expensive than regular forms of insurance.

Another flaw is that balance insurance makes only the minimum payment for you if you become injured, disabled or unemployed. This is a joke because the required minimum payment may be as little as something like 3 per cent of your total bill. Surely you can pay that on your own.

Even if you have balance insurance making your minimum payments, you'll still rack up interest on your outstanding balance at rates of about 18 per cent. Worse, some cards will automatically charge you interest on the next month's purchases if you don't pay the previous month's bill in full.

Maybe the worst thing about balance insurance is the stiff cost. As the FCAC explains, you pay a premium each month for balance insurance that is based on your actual monthly balance. The cost range for each $100 of coverage is between 69 cents at TD Canada Trust for up to $10,000 in coverage and $1.29 at Hudson's Bay for unlimited coverage. Petro-Canada charges $1.50 per $100, but only offers $1,000 worth of coverage.

Your premiums would change from month to month, based on your balance. A minimal balance would mean negligible premiums, while a big splurge of $5,000 could cost you in the area of $35 to $65 in one month alone.

The FCAC says these premiums can be especially costly if they nudge you above your credit limit. Some cards now charge over-the-limit fees of as much as $25.

If you still want balance protection, be aware that you have to be younger than 65 or 70 to qualify for some types of coverage.

Be sure to ask about what the insurance covers, what conditions have to be met to obtain benefits, what illnesses and disabilities are covered, the maximum period for which benefits are paid and whether supplementary cardholders are also covered.

RBC, too

Add Royal Bank of Canada to the list of banks actively marketing multiterm mortgages, which were the subject of Tuesday's column. RBC's Homeline Plan allows you to borrow up to 75 per cent of the value of your home. Within this framework, you can create various mortgage segments with different terms and rates, as well as a secured line of credit.

rcarrick@globeandmail.ca