“I’ve been paying redundancy insurance on my credit card, as well as credit shield insurance, for some time. It’s not a massive premium, but do you think it’s still worth paying?”
 
This is a very topical question, what with the current economic climate, and one that a number of people may be considering. In theory, this type of cover can be worthwhile, but, as always, you need to read the small print and work out exactly what is and isn’t covered. I will outline the key points of each type of cover.

 Redundancy insurance is often sold with mortgages, credit cards and other loans. This form of cover is often known as income protection or payment protection. This cover provides payments to the credit card company or bank when someone loses their job. But the amount that can be paid out usually equals 10 per cent of the person’s indebtedness, subject to a maximum amount (typically AED4000) payable for every month of unemployment up to a maximum period of 12 months.
Redundancy insurance cover can help you protect either your salary or mortgage repayments if you lose your job due to redundancy. The benefit that you are allowed to insure is typically 50 per cent of your normal income. You can choose to receive benefit payments after either 30 or 60 days of continuous unemployment and benefits will cease after you have received either 12 or 24 monthly payments.

Credit shield insurance is designed to provide a financial institution with protection against failure of its customers to pay their debts or credit card payments due to their untimely death or disability. In addition to the basic death cover, the following optional benefits are available: permanent total disability due to accident, accidental death and permanent total disability, critical illness and in-hospitalisation treatment in case of accident. Credit shield insurance typically offers to insure the person for up to AED100,000 or the credit limit – whichever is lower. The same amount of cover would be offered for any of the optional benefits if they were selected.

So, let’s examine these policies in detail to see whether they are worthwhile. First, the redundancy cover. In order to take the benefits, you need to prove that you were made redundant. This is usually in the form of a letter from your employer confirming the redundancy. My first concern is proving that you have been made redundant and that it was involuntary. What happens if the company goes out of business and there is no one to verify that you have actually been laid off? What happens if your employer states that you are being terminated rather than being made redundant (possibly so they can avoid paying additional benefits)? It is vital that this point is clear to make sure that the cover actually protects you for the benefits that you believe you are entitled to.

The next issue to be aware of is the benefits that the cover offers. If it is only paying 10 per cent per month of the debt, the debt is not being repaid – it is just the interest that is being serviced. This means that if you don’t make any other payments to the account, your debt will not reduce, but at best will stand still. The cover also usually has a maximum cash limit per month, so if your regular payments are above this, your debt will still be accumulating.

The cover is also only for a fixed period of time, typically 12 months, so if you do not find a new job within this period of time, you will again become liable to start repaying your debt again.

The second type of redundancy cover that I mentioned, which protects your salary rather than your debt, is potentially more valuable. However, as far as I am aware, it is not available in this region, as until recently there simply hasn’t been the demand. However, if it was available, it has similar flaws to the previous cover in that it only covers half of your salary and for a limited period of time.

The credit shield cover is a simple form of life cover and will only ever pay enough to protect the credit card provider. This is why the cover is so cheap. The chances of your untimely death while you hold the card, and at the point where you have the maximum balance, are very small.

In summary, redundancy and credit shield insurance can be useful as long as you are aware of the limitations. They are relatively cheap forms of insurance, but the benefits, while potentially useful, are not going to be able to completely protect you should you lose your job. The cheapest and most efficient way to manage your credit card would be to pay off the outstanding balance at the end of each month, and then you wouldn’t need either insurance.