Hidden in the fine print of many credit card solicitations are offers detailing how consumers may insure their card debt in case they die accidentally, become disabled, or lose their jobs.
But the tiny print belies the huge profits this business contributes to card issuers' bottom line.
There are about 50 million accounts representing cardholders who pay monthly premiums, ranging from $6 to $10, to insure their card debt, and only about 550,000 people actually file claims each year, according to the American Bankers Insurance Group of Miami.
Next to the interest rate charged on a credit card, such premiums are often card issuers' second-largest source of fee income, said Robert M. Reilley, vice president of the company, which sponsored a conference last week in Key Biscayne, Fla., on insurance linked to credit cards.
"It is obscenely profitable for banks," said Michele Turkel, of Spectrum International Consulting Corp., Scardsdale, N.Y.
Card issuers typically get 25% to 30% of the cardholder's insurance premium. In some cases, card issuers can generate extra profits by striking deals with insurers that provide payments when the level of claims is low, said Ms. Turkel.
While growth of this product has been relatively stagnant for several years, insurance providers are seeing increased interest from people attracted to the unemployment protection.
Typically, card issuers sell unemployment, life, and disability insurance bundled as one package. The disability portion of the deal is the largest claim generator.
Nowadays, more people are signing up for credit card insurance because they feel less secure in their jobs, said Mr. Reilley.
In the event of a claim, insurers pay a cardholder's minimum payment, about 2% of the outstanding balance and sometimes up to 5%, and generally the payments are limited to one year. In cases of death, the insurer pays off the entire balance.
Insurers maintain that consumers benefit because they are protected from collection agencies while they look for work or recover from an illness.
But there are outspoken critics of this type of insurance.
It has "a bad rap," said Walter D. Runkle, vice president, government relations of the Consumer Credit Insurance Association, a trade group for insurance companies, "in part because Steve Brobeck of the Consumer Federation of America has called it one of the biggest ripoffs."
"Our business is wrongly maligned," said Mr. Runkle, who pointed to the required disclosures, which explain that consumers may not need credit card insurance, particularly if they already have other types of insurance.
Moreover, insurance regulators are stepping up their oversight of the industry.
During the past four years, the National Association of Insurance Commissioners made revisions to its model laws, which states are free to adopt, addressing issues concerning consumer disclosures, premiums, and insurers profits.
Still, though nearly every issuer offers card insurance products, they apparently are not widely used.
Margaret J. Bellock, vice president of products and services for Novus Services Inc., a division of Dean Witter, Discover & Co., said that less than 5% of the company's 35 million card accounts are insured.
About 6% of the accounts in the average card portfolio use credit insurance, said Mr. Reilley.
Ms. Bellock pointed out that customers who buy card insurance are more likely to be delinquent with their payments, so issuers also view this insurance as a form of protection against losses.
"There is a perception that insurance provides the lender with more security, but it is primarily a revenue generator for banks," said William Burfeind, executive vice president of Consumer Credit Insurance Association.
According to a 1994 survey of people who buy credit life insurance, conducted by the Credit Research Center of Purdue University, people who have lower incomes, have not gone to college, and have little if any life insurance are most likely to buy credit life insurance. A large majority of respondents earned less than $20,000 annually.
The most common reason cited in the survey for buying this type of insurance was to ensure that debts would not be a financial burden to others.