Beware of Payment Protection Plans
During times of recession and job loss, debt payment protection plans sound like a financial life jacket that can keep you afloat. Credit card issuers market protection plans as a way to prepare for the changes and hardships in life. But it is critical for consumers to read the fine print to understand the limitations and restrictions of these offers because they may not be as compassionate as they sound. In fact, they can even be misleading. This supposed safety net for cardholders has turned into a billion dollar industry for banks and credit card issuers.
In 2009, consumers paid about $2.4 billion on 24 million accounts for debt protection products, according to a study by the U.S. Government Accountability Office. The GAO studied data from the nine largest credit card issuers and found that cardholders received just 21 cents in tangible financial benefits for every dollar spent in debt protection product fees.
Credit protection plans can provide some insurance for life events–such as unemployment or disability–that may prevent you from making your loan payment. Debt protection products suspend or cancel all or part of a consumer’s obligation to repay an outstanding credit card balance when a qualifying event occurs. These protection plans actually protect the lender from your inability to repay by making payments to the lender on your behalf.
There are three main types of payment protection plans:
- Those that pay all or some of your loan if you die during the term of coverage.
- Involuntary unemployment protection pays a specified number of monthly payments if you lose your job and it wasn’t your fault.
- Disability protection pays a limited number of payments if you become ill or injured and can’t work.
Some issuers have expanded the protection to other life events. Bank of America can cancel up to three minimum monthly payments for two of the following events per year: new residence, marriage, divorce, college, childbirth/adoption and retirement.
How Payment Protection Works
Payment protection is optional and not automatically included in credit card benefits. The cardholder can choose protection by saying yes over the phone, or by filling out an online or paper application. Before signing up for the insurance, consumers need to read the fine print about the restrictions and limitations of the program.
Citibank has a list of qualifications that must be met to receive unemployment protection payments: you must be employed working at least 30 hours a week, considered to be permanent (not employed by a member of your family) for at least 90 days preceding the job loss, qualify for state unemployment benefits, and lose your job and remain unemployed for 60 consecutive days because of layoff, general strike, or involuntary termination by the employer.
Capital One says “you will receive this benefit only for as long as you continue to be unemployed or unable to work. If your inability to work is due to termination, upon our request, you must furnish initial documentation of your loss of employment, as well as periodic confirmation of your continued unemployment and eligibility for this benefit. If your inability to work is due to temporary disability, you must be physically unable to perform any work or service for wages, gain, or profit. You must also be regularly attended by a licensed physician who must certify your continued disability each month, upon request.”
Payment protection may not cover your whole balance. Some issuers cap the payment at $10,000. Bank of America can cancel up to $25,000 for loss of life.
Payment insurance is not a free benefit and the insurance fees vary by issuer. The Capital One and Citibank Payment Protection fee is $0.99 for every $100 you owe. The Chase Payment Protection Plan is $0.89 per $100 of your ending monthly statement balance. Bank of America Charges $.85 for every $100.
If your credit card balance is $5,000 and the fee is $0.99 per $100, you will pay $49.50 that month for insurance. This fee is rolled into your balance, so you will also pay interest on the fee.
Questions to Consider Before Purchasing Payment Protection
- How much is the monthly fee
- Will the insurance cover the full length of your loan and the full loan amount?
- What are the limits and exclusions on payment of benefits? Know exactly what’s covered and what’s not.
- Is there a waiting period before the coverage becomes effective?
- If you have a co-borrower, what coverage does he or she have and at what cost?
- Can you cancel the payment protection? If so, is there a refund available?
- Will filing for benefits affect your credit limit?
- Are you eligible to receive the benefits?
Fines and Regulations
Debt protection products are federally regulated and now fall under the Consumer Financial Protection Bureau (CFPB). As banks use payment protection plans to make revenue from their customers, they are also drawing regulatory attention and large fines for aggressive sign-ups and misleading marketing. Here are three examples:
- The CFPB recently fined Capital One $210 million in allegations that the bank’s third-party telephone vendors pressured or mislead consumers into paying for “add-on products” such as payment protection.
- In July, HSBC set aside an additional $1 billion to compensate customers who were sold payment protection insurance. British regulators found some customer clients were forced to buy, or didn’t know they had purchased, insurance to cover repayments on credit cards or mortgages. According to Bloomberg News, the bank had already made a $717 million provision for so-called payment protection insurance compensation through the end of 2011.
- Discover faces an enforcement action and fine from the Federal Deposit Insurance Corporation and CFPB over its marketing of the plans and other add-on products that it pitches to credit card customers. According to the Wall Street Journal, Discover said losses from the matter could exceed $110 million, according to a regulatory filing. A U.S. district-court judge in Illinois in May approved a settlement Discover reached with the plaintiffs in eight class-action lawsuits.