Saturday, December 04, 2010

A lesson in credit card insurance & irresponsible marketing

A few days ago, I got a call from a guy from XYZ bank. He wanted to introduce me to an insurance product that settles my credit card balance in case of death or if im diagnosed with a critical illness. aside from settling my balance, there is also a certain sum to be paid out to me/a nominee if the above happens (about 50K-100K).

he said that if i die, my family would not have to bare the burden of settling my credit card debts. i just had to stop him there.

now when did my family or anyone else aside from me became liable for my credit card debt? a credit card is a 'clean' credit facility - meaning no security is offered in exchange for the facility given. there is no collateral nor did anyone formally promised to XYZ bank "if sunny defaults, i will be responsible".

he then started to mumble out some technical mumbo jumbo about the credit card form that i signed containing such clause and my family is legally obliged to pay off the card debt if i die. he also said the 'mother's maiden name' part that i filled up (which is standard in all credit card forms for security check purpose) is naming that person as liable for my debt. my mother?!

 i was just giggling on the other end as he tried so hard to twist the facts. again, fact is, no one is going to be liable for my credit card debts when i die and they have no right to chase after anyone for payments. our country has strict laws protecting guarantors and banks actually have to adhere to strict guidelines before a guarantee is legally enforceable. credit card form?what a joke. there was never even another signature aside mine and only mine!

now, similar products such as mortgage insurance or housing loan insurance is fair as your house is offered to the bank. if you die and no one pays, your loan defaults and your house will be sold off to recover the loan. so there is a real burden on your family to continue servicing the loan. thus, an insurance for mortgage is actually an important thing an almost a necessity.

even so, if no family member gave a personal guarantee on the loan, the liability on them to pay if you cant pay due to disability or death is indirect. bank wont say "you pay because you are his wife, son, etc" will say "if no one pays, bank will have to sell off the house so please pay or you would have to find elsewhere to stay"..

and so, back to the credit card case where there is no security offered and no guarantee given, it is wrong to sell this insurance saying if you die, your family wont be burdened etc because no, they are not legally binded. in practice, card companies usually would end up writing off your debt as a loss to them if you die and dont pay. so when you buy this insurance, you are paying premium to insure them from loss arising from risk of death!

of course, there is the pay out sum payable but that is actually just like a personal accident coverage and you could probably get it cheaper elsewhere. and if that guy marketed the insurance product as an accident/life policy, i would have spared him the lecture on the above. poor guy, he sounded agitated and probably just wanted to end the call at that moment.

well, there are cases where credit card debt could have a real effect on your family. firstly if the amount is large enough for the bank to sue for bankruptcy and exercise claim on your assets to recover the debt. i am not sure about the amount, probably minimum 30-50K. you probably would also have a housing loan that will default and thus the card company will have a claim on the sales proceeds, ie, less of the balance from sales of your asset after settling other loans would be left for your family (even so, im not sure if suing for bankuptcy in case of default due to death is legally possible)..

or if you have other loans, e.g mortgage, at your card issuing bank, you would probably be binded by a 'consolidation clause' whereby all your loans at the bank will be consolidated as one amount for recovery in case of default and thus, your credit card debt, regardless of amount, makes this figure higher.thus less of the balance from proceeds from sale of asset will be given back to your family.

finally, the bigger point in all this is that many times, especially when dealing with insurance products, marketers will try to create a need for a product so that you feel that it is necessary to have it. sometimes the need is real but sometimes, like the example above, it is fictional. fear is another thing that marketers, especially insurance agents, would try to put in customers as people dont like fear and would buy something if it reduces that fear.

i feel that we are very third world when it comes to marketing financial products. we need more people who don't just sell at all cost, but instead advise on product features and needs. people who dare to say "oh, i think my product is not suitable for you" if that's the truth.

p/s: the guy from XYZ bank apologized and claimed that he was taught that way by the training ppl to market the product.tsk tsk tsk...