Credit Card “Insurance”–Big Profits/Small Benefits

Let’s say you owe money on your American Express card, and you’re worried about unpredictable events that might negatively impact your ability to pay that debt. Then a flyer arrives from American Express offering you their Account Protector.

Account Protector from American Express helps during many of life’s ups and downs by canceling the minimum monthly payment, up to $500 each month of the eligible event term, if you experience a covered event.

American Express offers its Account Protection for just 85¢ per $100 of your monthly statement balance. Maybe Account Protection is just what you need.

American Express lists 14 “covered events”…also referred to as “life events.” They are, with maximum number of months of coverage in brackets:

hospitalization [1]
marriage [2]
purchase of a new home [2]
relocation of more than 150 miles [2]
starting college [2]
divorce [2]
birth of a child [2]
adoption of a child [2]
death of a spouse [2]
call to active military duty [2]
leave of absence [3]
involuntary unemployment [24]
long-term disability [24]
death [all debt canceled]

At 85¢/month, this kind of “insurance” sounds cheap, but it’s not a good deal…except for American Express.

Here’s a simple example that shows how costly this protection is. Let’s say you have an unpaid balance of $1,000. Your Account Protector fee would be $8.50/mo (85¢ x $1000/$100). But your benefit, which equals your minimum monthly payment (2.5% of your account balance), is only $25.00. That means that in just three months you will have paid slightly more in fees than the benefit that comes from one month of protection. And American Express’s fine print states that you are eligible for no more than two life event benefits in any 12-month period and only one life event benefit in any two-month period. So if this year’s two life events each yield, say, two-month benefits, you would have paid $102 (12 x $8.50) and received benefits of just $100 (4 x $25). You could have saved $2 by doing nothing.

Looked at in another way, Account Protector adds 10.2% (85¢/$100 x 12) to your nominal credit card interest rate, which on some cards may already be more than 18% per year (American Express is one of the lowest at 13.24%).

Only if your employment is terminated (and here you must apply and qualify for state unemployment benefits and register with a recognized employment agency) or you suffer long-term disability (doctor’s report required) does Account Protector pay off.

Even death may not make it worthwhile. Under existing law, when an individual dies, credit card debt becomes a debt of the estate, and if there are no assets to pay the credit card company, the card company can’t legally force someone else to pay.

How do financial institutions get away with selling snake oil masquerading as insurance? First, credit card issuers are an oligopoly with minimal competition (there is no “public option”). Second, Account Protector and its competitors’ similar services (almost every other credit card issuer offers a something like it) are never referred to as insurance. For that reason, they is not regulated by state insurance commissions; they slide into your email or mail box as one of the many fine services financial institutions offer to their customers.

Account Protector is a high-profit item for American Express. Avoid.

Speaking about insurance non-insurance, in case you’ve forgotten, credit default swaps, so named to hide their true nature as insurance policies, were the arcane, unregulated, black-mustachioed, villainous non-insurance instruments that allegedly murdered Bear Stearns, Lehman Brothers, AIG, and Merrill Lynch.