We then divide the sum of the daily balances by the number of days in the month:
$92,000 daily balances ÷ 30 days =
Finally, we multiply the average daily balance by the premium to arrive at the daily cost of the insurance:
$3,066.66 average daily balance 1.20% premium =
$36.79
For the month of April, Jane would pay $36.79 for her credit card insurance.
Taking our example further, imagine Jane has the insurance for twelve months, at which point she is in a car accident and is hospitalized for six months. If her credit card insurance covers 5.00% of her monthly balance until she is healthy enough to go back to work, how much will the credit card company pay out? Assume that she maintains an average daily balance of $3,066.66 before her accident.
To calculate this, we multiply her average daily balance by 5.00%, and then multiply this figure by the number of months she cannot work due to the accident:
$3,066.66 average daily balance 6 months =
$153.33 monthly payments from insurance
$153.33 monthly payments from insurance 6 months =
$919.99 total payment from insurance
What is the compensation provided by credit card insurance?
The compensation provided by your credit card insurance depends on the reason for making a claim. If you become critically ill or die, your entire balance may be paid off by the credit card company. In the event of involuntary unemployment or disability, the credit card issuer may only pay 5.00% (as an example) of your balance (the balance at the time you became unemployed or got injured) every month until you are better. They will generally continue to do so until either you are no longer disabled or they have paid out an amount equivalent to your balance at the time you were injured. The maximum compensation paid out is typically $25,000.]
Is credit card insurance worth it?
There are three instances when credit card insurance may not make sense:
- Do you normally only have small daily balances?
- Do you have large amount of savings?
- Do you have significant life and disability insurance already?
If you answered yes to any or all of these questions, chances are you do not require credit card insurance. If you only make small purchases and never carry credit card debt, you shouldn’t need this type of insurance. The same rule applies if you have a large amount of money in savings. In addition, if you already have life and disability insurance, odds are you already have sufficient coverage in the event that something happens to you.
If you answered no to all the questions, it doesn’t hurt to look into credit card insurance. However, keep in mind that over time you can end up spending a lot of money on this kind of insurance that otherwise could have been used to pay down your balance.
