What Is a Payment Protection Plan?
A payment protection plan is a form of coverage offered by some credit card issuers and other lenders that lets a customer stop making minimum monthly payments on a credit card or loan debt during a period of involuntary unemployment or disability. The plan may also cancel the remaining balance on the account if the borrower dies. Payment protection plans for credit cards generally charge a monthly fee based on the amount owed and the situations covered. They are also referred to as debt protection plans.
Key Takeaways
- Payment protection plans are offered by some credit card issuers and other lenders to their customers.
- The plans promise to let borrowers stop their payments for a period of time if they become unemployed or disabled and/or to cancel any remaining balances if the borrower dies.
- Payment protection plans are optional and require the borrower to pay a flat or monthly fee.
- Rather than a payment protection plan, it often makes more sense to buy disability and life insurance—or to build up an emergency fund.
How Payment Protection Plans Work
The Consumer Financial Protection Bureau (CFPB) characterizes payment protection plans as one of several "add-on" products sold by credit card issuers. Whether on not you buy a payment protection plan will not affect whether you qualify for a particular credit card or the terms that the issuer offers you.
As the CFPB explains, "consumers may purchase the products when they apply for a new credit card or can add them to an existing credit card account. Card issuers often enroll new account holders in these products through either the credit card application, or at the time the consumer activates the credit card. Existing account holders can typically purchase the product by telephone, mail, or through the credit card issuer's website."
Typically, the CFPB adds, cardholders will be charged a monthly fee for the plan, either as a flat fee or as a percentage of the statement balance.
Payment protection comes in two basic forms, and a particular plan may provide either or both. Debt suspension allows the cardholder to stop making payments for a period of time if they meet certain criteria, such as losing their job or becoming disabled. Debt cancellation ends their obligation to pay all or part of the remaining debt, typically in the event of death.
Qualifying for benefits isn't always easy. Here, for example, are some of the requirements you might have to satisfy to take advantage of a payment protection plan's coverage if you become disabled:
- You'll have to be under a doctor's care for an accident or injury that makes you unable to work in any job you're qualified for, not just the job you normally work at.
- You'll need to have been working for several months at the time you signed up for the payment protection plan. (You can't purchase it if you're already unemployed.)
- Your disability must have lasted for more than 30 consecutive days before payment protection will become active.
Note that even if you meet the requirements, coverage will only last for a limited period of time, such as 12 months, regardless of whether your disability extends beyond that. In addition, it will only cover up to a certain dollar amount, as specified in the agreement.
All of the details of a particular payment protection plan should be spelled out in the plan agreement and disclosures, which you should be able to access from the credit card issuer's or other lender's website.
How Payment Protection Plans Are Regulated
While they may appear to be a form of insurance, payment protection plans are technically considered a financial product. As such, they are regulated by a variety of agencies, depending on the type of financial institution that is selling them.
National banks are regulated by the Office of the Comptroller of the Currency (OCC), state-chartered banks by the state banking department of that state. Most credit unions are regulated by the National Credit Union Administration (NCUA).
What Does a Payment Protection Plan Cost?
The cost of payment protection can vary from issuer to issuer and according to the type of coverage the plan provides. Scanning the websites of credit card issuers that sell these plans (and not all do), we found that prices of from $1 to $2 per month for each $100 in credit card balance were relatively common. So, for example, a cardholder with a balance that hovered around $5,000 each month, could pay roughly $50 or $100 a month and $600 to $1,200 a year for coverage.
Alternatives to Payment Protection Plans
Although a 1% or 2% monthly fee might seem relatively small—especially compared to the double-digit interest rates most cards charge on outstanding balances—it can add up.
Instead of a buying a payment protection plan, many people may be better off putting that money into an emergency fund. They can use an emergency fund for many purposes besides repaying debt, and it's theirs to keep if they never end up spending it.
Another good use of the money could be to purchase long-term disability insurance and/or term life insurance. They can cover the same risks as a payment protection plan and are also more flexible in terms of how the money can be used.
What Is Credit Life Insurance?
Credit life insurance is a type of life insurance meant to pay off a loan if the borrower dies. It is often bundled with the loan and included in the loan's principal amount.
What Is Mortgage Protection Insurance?
Mortgage protection insurance (MPI), sometimes simply referred to as mortgage insurance, is a type of credit life insurance that can pay off your mortgage if you die. It is optional and not to be confused with private mortgage insurance (PMI), which many lenders require borrowers to purchase unless they make a down payment of at least 20% on the home. PMI helps protect your lender if you default on the loan, whether you're living or dead.
How Much Money Should You Have in an Emergency Fund?
Financial experts often suggest keeping three to six months' worth of living expenses in a relatively liquid account. You may need less if you have other financial resources to draw on in an emergency, or more if you have few resources and your job is on shaky ground.
The Bottom Line
Payment protection plans are often offered in conjunction with credit cards or other loans. They may be useful to some people, but there are less expensive and more flexible options for achieving the same purpose.
