Is Credit Card Life Insurance a Scam?

Q: Is credit card life insurance a scam or not? It is offered on my Chase and Bank of America credit cards.

A: Life insurance pays out cash to a beneficiary when the policyholder dies… that is not what credit cards offer (at least not in the traditional sense). However, there are a couple quasi-life insurance services offered by credit card companies. You didn’t specify which one you were referring to, so I will discuss both types:

Travel Accident Insurance

This is offered on many major cards nowadays. In fact, I frequently see it listed as a benefit not only on premium credit cards, but also many of those which have no annual fee. However to call this credit card life insurance would be incorrect, because it only covers cardholders in very limited circumstances.

Generally speaking, this benefit only kicks in when a cardholder has purchased eligible travel using their credit card. What constitutes “eligible” travel you ask? Well, the exact rules and restrictions will vary by card, but all of them usually have one thing in common and that is they only cover eligible travel during Common Carrier Conveyance – that’s an insurance term used to reference a ticketed passenger on a plane, ship, bus or plane (but consult your credit card company for their exact definition).

In the event you are a ticketed passenger traveling via the aforementioned, if you are killed or dismembered (loss of limbs) then the insurance will kick in, assuming the trip qualifies according to whatever the credit card company’s rules may be. For cards that offer this, the death benefit is usually anywhere from $100,000 to $500,000 (paid to your heirs) and the dismemberment benefit will probably be a fraction of that.

Worth it or not?

It’s typically a free cardholder insurance benefit so I don’t see how someone could argue it’s not worth it. That being said, the odds of ever using it are very slim (it’s highly unlikely you will die in a passenger plane crash or train wreck!). Regardless, it wouldn’t hurt mentioning this possible benefit in your will, so in the very unlikely event it does happen, your heirs will remember to make a claim for it.

Credit Card Payment Protection Insurance

Most major credit card companies offer this fee-based add on, including American Express, Discover, Citi, Chase, Bank of America and others. Although they each have their own rules, they are very similar to one another – when the benefit kicks in during a covered event, interest will stop accruing and minimum payments will not be required.

Examples of covered events may consist of one or more of the following, depending on the bank:

  • Job loss
  • Medical disability
  • Life events such as marriage, baby, etc.
  • Death of cardholder

In the event of cardholder death, there are payment protection plans that will waive the balance on the account up to a certain amount; usually $10,000 or $25,000. Although some call this aspect of the plan credit card life insurance, that’s not what it is… the card issuer is basically paying itself, not anyone else.

Worth it or not?

For a cost of around 1% of your monthly balance, this is not a cheap add-on to have. It’s not a “scam” and speaking of the plan offered by Chase, theirs is actually a notch better than the other issuers. That being said, in my personal opinion, I think it is rarely worthwhile for the consumer to pay for these plans. To find out why I recommend reading this post about credit card payment protection insurance.

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