Guest post: Why debt protection insurance doesn't make sense

When you get a new credit card and some types of loans, the lender may ask you if you want to enroll in a debt protection, or credit protection, insurance program. The lender will tout the benefits of not having to worry about your payments if you lose your job or become disabled, but is this insurance really worth the cost? Usually not, and here is why.

Caps and Limitations

The devil of these plans can be in the details. Some cover all of your debt, while others will only tackle part of it. That sounds great, but you have to read the fine print carefully. There are usually caps to the payments. Sure your payments will be covered, but only up to $500 on some plans. Unemployment benefits may only apply to full time employees who have qualified for state unemployment benefits. The disability benefits may only pay out if your submit proof of disability on a monthly basis. Be sure to ask about limitations, waiting periods, and how to cancel before signing up for one of these plans.

Ridiculous Costs

The cost of these plans can be outrageous. They are based on your balance. If you pay off your balance every month, then the plan is free, but carry a balance and you could pay as much as $1.35 per month for every $100 you owe. The average American has a little over $5,000 in credit card debt. That means a plan of this type could be costing you $67.50 per month. Lenders collected about $2.4 billion in premiums last year, but only paid out less than $500 million in benefits. That is close to $2 billion in profit or close to $2 billion wasted dollars depending on your point of view.

Legal Issues

Then there is the legal trouble that several banks have been facing over debt protection plans. Capital One has been fined $210 million for ''deceptive'' practices related to debt protection. HSBC has a $1.3 billion fund set up to repay British customers because they ''pushed customers'' into buying one of these plans. Hawaii has successfully sued HSBC, Bank of America, and JPMorgan Chase for similar tactics.

Your best bet is to skip the debt protection racket and take these steps to create your own ''insurance'' plan: calculate what your premium would be (take $1 per $100 owed) and put that amount into your savings account. Attack your balances by increasing your monthly payments and putting the cards away for 60 days. If you feel the need for life or disability insurance, get a plan from a licensed agent that will cover all of your needs instead of limited coverage for your debts.

This article has been provided by the experts at NorthCarolinaAutoLoan.com.  They help people get approved for auto loans in Wilmington, NC, and across The Tarheel State.  Learn more at their YouTube channel.