Be wary of credit insurance for jobless

NEW YORK — New York -- If you lose your job, one of the first things you worry about is bills. How will you pay your mortgage or keep your credit cards current, with no earnings coming in?

One answer is credit-unemployment insurance, sold by many lenders or through the mail. If you lose your job, and meet certain other conditions, your insurance policy will make the monthly payments for you.


Critics say credit-unemployment insurance is overpriced. And in fact, many states have the premium structure under study. If you're still interested, however, here's what to look for before you buy:

* Is there layoff protection? Some policies pay only if you've been fired permanently, which isn't good enough. As all workers know, a "temporary" layoff may last forever. Your insurer should be prepared to help.


* How long are you covered? On the mortgage side, some policies pay benefits for up to a year. Others pay only for four to six months. Short-term coverage doesn't offer much protection, in an economy where job searches can take a year or more. On installment loans, coverage may also last only six months. On credit cards, however, some policies pay for as long as you're unemployed (or until your original debt is repaid).

* How soon will the policy takes effect? You normally have to hang on to your job for at least three months before becoming eligible for full benefits. So there's no point buying a policy when you know that your job will soon be axed.

* How soon will benefits be paid? Your waiting period shouldn't exceed one month from the day you lose your job (although temporary layoffs may not be covered until two months have passed).

* Will the policy cover both spouses? If you both work, partial payment should be made on your bills if either one of you gets fired. Mortgage policies typically offer this benefit; credit-card policies don't.

* What if your labor union goes out on strike? Some policies pay, others don't.

* What's not covered? No policy pays if you quit your job, retire early, leave work due to pregnancy or disability, are fired for "willful misconduct" or join an unauthorized wildcat strike. Normally, you cannot collect unless you register or qualify for unemployment benefits. So this coverage is a waste of money if you won't stand in line at the unemployment office. If you're self-employed, you cannot get credit-unemployment insurance at all.

There are various ways of pricing credit-unemployment insurance. For mortgage coverage, Morgard Inc., in Rosemont, Pa., follows a sliding scale: 1 percent of your monthly payment, which is reasonable, to a ridiculous 10 percent, depending on your occupation, your personal job history and local economic conditions. Executives pay less than clerical workers. Blue-collar workers, who'd generally pay the most, are effectively priced out. Premiums can change annually. The maximum mortgage payment covered: $2,500 ($3,500 in California).

By contrast, lenders offering the new policy underwritten by American Security Insurance Co. in Atlanta charge a flat rate for everyone. At California's Glendale Federal Bank it's 3.75 percent for 12-month coverage, on monthly payments up to $3,500. On a $2,000 mortgage payment, that's $75. Not cheap. You can also choose six-month coverage for 2.75 percent.


For credit-card unemployment insurance, the premium is figured each month's unpaid balance. Typically, you pay 60 cents per $100. That's $12 a month, on an average balance of $2,000.

If you lose your job, the insurer makes only the minimum payment. That might be as little as $50 or $60 a month on a balance, depending on the card. So your premium is pretty high, compared with the benefits you get. You are covered for the balance on your card on the day you lose your job, not for anything charged subsequently. Furthermore, insurers usually don't pay for debt that exceeds your credit limit.

To make credit-card coverage a little more attractive, insurers also pay up to the policy limit if you become totally disabled or if you die. But considering what you pay for the coverage, it's still overpriced.