Involuntary unemployment credit card (IUCC) insurance is an intriguing concept. Imagine losing your job and an insurance company steps in to cover your credit card payments. Sounds ideal? Wait till you weigh in the costs and alternatives.
Many credit card companies present IUCC insurance as an additional offering, usually facilitated by a third-party insurance provider. It pledges to cater to the minimum monthly payment on your card for a specified duration or up to a capped amount, given the condition that you were not rendered jobless by your actions or that you are not self-employed. The cost fluctuates between firms but typically eats up about 1% of your outstanding balance each month. However, purchases are only valid while you still hold a job and a waiting period could be applied before the benefits commence.
Noticeably, IUCC insurance is frequently incorporated with other credit insurance packages, such as credit life and credit disability coverage. Despite its partial availability in Canada and elsewhere, its popularity in the United States has significantly waned, making way for a surge of debt or payment protection plans sold directly by credit card companies without the interference of third-party insurers. A 2011 report from the U.S. Government Accountability Office said, "Ten years ago, the largest credit card issuers rarely offered debt protection products and instead offered credit insurance, but today most issuers sell primarily debt protection products and rarely offer credit insurance to new customers."
The suitability of IUCC insurance deeply depends on various factors. Unsurprisingly, these factors also directly relate to payment protection plans. Taking a hypothetical example, consider a $5,000 outstanding balance on your credit card with a required minimum monthly payment of 3% of the balance, or $150. If your credit card firm offers IUCC insurance for a premium equal to 1% of your balance per month, you are in line to pay $50, bringing your total monthly liability to $200 until you are laid off.
Six non-layoff months would cost you $300 in insurance premiums alone. In comparison, if you were to save that $300, you might cover two months' worth of minimum payments, potentially providing breathing space until your next job.
Remember, insurance is not the only means to cover your monthly credit card bills. Alternatives exist that can be applied to payment protection plans. If the minimum monthly payment is not made, the credit card company can report delinquency to the credit bureaus, leading to a negative impact on the credit score. A host of ways to never miss your monthly payments range from calendar notations to automatic bill payments.
Financial experts often recommend maintaining an emergency fund equal to three to six months' worth of living expenses. This can act as a safety net, reducing dependence on such insurances.
So, is IUCC insurance the ideal way to safeguard yourself and your credit against layoffs? Perhaps not. It might be smarter to shore up finances now, even when your job seems secure because the best insurance could very well just be your own foresight and financial prudence.