Money Problems: Day 10 – Debt Insurance

Today, I am continuing the  series, Money Problems: 30 Days to Perfect Finances.   The series will consist of 30 things you can do in one setting to perfect your finances.  It’s not a system to magically make your debt disappear.  Instead, it is a path to understanding where you are, where you want to be, and–most importantly–how to bridge the gap.

I’m not running the series in 30 consecutive days.  That’s not my schedule.  Also, I think that talking about the same thing for 30 days straight will bore both of us.   Instead, it will run roughly once a week.  To make sure you don’t miss a post, please take a moment to subscribe, either by email or rss.

On this, Day 10, we’re going to talk about debt insurance.

Debt insurance is insurance you pay for that will pay your lender in the event of your death, dismemberment, disfigurement, disembowelment, or unemployment.  Exactly what is covered varies by insurer, type of debt, and what you are willing to pay for.

Private Mortgage Insurance(PMI) is a common form of debt insurance.   Generally, if you take out a mortgage with a down payment under 20%, you’ll be expected to pay for PMI.    According to the Homeowners Protection Act of 1998, you have the right to request your PMI be cancelled after reducing your loan amount to 78% of the appraised value of the property.  That ensures that the lender will be able to recoup their money by seizing the mortgaged property if you should happen to fall under a bus or get hit by a meteorite.

Another common form of debt insurance is for your credit cards.  Card companies love it when you buy their insurance.   If you buy their life insurance, your card is paid off when you die.   Disability insurance pays it if your get hurt.  Unemployment insurance…you get the idea.

Here’s the deal:  Get life insurance and disability insurance separately.  It’s cheaper than getting it through your credit card company and let’s you get enough to actually live on if something tragic happens.   Unless, of course, you die.  Then it will leave enough for your heirs to live on.

As far as unemployment insurance, build up your emergency fund instead.  That’s money that gives you options.   Credit card insurance is money flushed down the toilet.  Many of these policies cost 1% of your balance.   If you’ve got a $5,000 balance, that will mean you are paying $50 per month.  By comparison, if you’ve got a 9.9% interest rate, you’ll be paying about $40 per month in interest.

Debt insurance is a bad idea, if you can possibly avoid it.  A combination of life insurance, disability insurance, and an emergency fund provide better protection with more flexibility.

Your task for today is to review your credit card statements and mortgage agreement and see if you are paying debt insurance on any of it.  If you are, cancel and set up the proper insurance policies to protect yourself and your family.