Each of us has dreams. Lately, though, many of us have had the same nightmare: What would happen to our checking balances and our sanity if a pink slip floated our way?
Although some pundits have pronounced the latest recession officially dead, the relentless pace of company layoffs and restructurings continues. The economy, it seems, is now marching to a different drummer, and pink slips are an ever-present possibility.
Given that many workers live from paycheck to paycheck, any salary interruption could quickly call out the bill collectors.
When there’s risk and worry, insurance programs are sure to follow.
“All the major credit card issuers such as Chemical Bank, Chase, Citicorp and First Chicago offer insurance that will pay the minimum on your credit card bill if you are laid off, become disabled or die,” says Robert B. McKinley, president of RAM Research Corp., a Frederick, Md., firm that tracks the credit card industry.
“The 10 big issuers have half of all credit card holders. Smaller card issuers also sometimes offer these insurance plans,” says McKinley.
Although less common, there are also programs that will pay your mortgage bill under the same circumstances.
The federal government also offers workers who are terminated a security blanket of sorts through a law known as COBRA, which allows you to keep your employer-sponsored group coverage-at your expense-for up to 18 months. Another, albeit riskier, alternative is to purchase short-term health insurance from a private provider.
The best security net workers can craft for themselves is to sock away at least three months’ salary in liquid savings, say experts. In fact, paying insurance premiums for unemployment coverage may be a waste of precious cash that would be better put into building savings.
What’s more, if you are laid off, you can contact your credit card company, mortgage holder and other creditors and explain your situation, says Mary Rose, program director at Consumer Credit Counseling Services of Evanston and Skokie Valley.
“Explain your situation honestly. Most companies will allow reduced payments for up to two months.”
Although credit card unemployment insurance, which is bundled with death and disablity coverage, is generally “a waste of money,” says Ruth Susswein, executive director of Bankcard Holders of America, a non-profit group based in Herndon, Va., “if you have a good reason to believe you may be unemployed in the next six months, then it might be something to look into.”
You can call your credit card issuer to inquire about the availability of such plans.
“Card issuers usually include blurbs on the top of their bill that say something along the lines of `Our plan makes your payments if you can’t,’ ” McKinley explains.
Once you spot the bold headlines, make sure you read the fine print, warns McKinley, who generally advises consumers against credit card coverage.
“The typical cost is 60 to 65 cents per $100 of credit card balance, which makes it outrageously expensive,” he says.
That means that if you usually hold a $1,700 balance-the average for most people who carry a balance-you’d be paying about $10 or $11 each month for the coverage.
The plans pay off all of your balance if you die, but pay just the minimum due each month if you’re laid off or disabled. What’s more, interest charges keep accruing. And if you are laid off, says McKinley, “you’ll have to show all kinds of documentation to prove what happened.”
All cardholders can usually obtain the insurance with certain key restrictions. First Chicago Corp. for instance, offers insurance to its card base, “but you can’t have a pre-existing illness or be currently unemployed, and your account has to be in good standing,” says spokesman Thomas Kelly.
Many more restrictions exist on insurance plans that will pay your mortgage when you’re out of work. For one thing, unlike credit card plans, which you can sign up for anytime, the insurance for mortgages generally is available only when you take out a loan.
And very few lenders offer the unemployment insurance to borrowers. That’s because the companies that actually underwrite the insurance have found it unprofitable.
However, with the recent rise in interest rates, refinancings have dried up, and mortgage lenders are more aggressively pushing to find borrowers. St. Paul Federal Bank has picked up on a marketing ploy involving mortgage unemployment insurance that began on the West Coast.
“Any borrower buying a home-not a refinancing-can get their loan payment covered up to a maximum payment of $2,500 for six consecutive months or six months in total if they are laid off,” explains Moira J. Murray, vice president and operations director of St. Paul Service Inc.
The coverage is free during the first year; borrowers receive it with their loan. But Murray says the borrowers must work at least 30 hours a week and have been employed for at least 24 consecutive months to qualify for the insurance.
“You also can’t be self-employed, active in the military, be retired, over age 65 or be a seasonal worker,” Murray adds.
Chase Home Mortgage Corp. is one Chicago lender that does offer unemployment insurance for borrowers buying and refinancing. The coverage costs 3.5 percent of the monthly mortgage payment for Illinois residents. The plan will begin picking up mortgage payments on the 61st day of a layoff, or the 31st day of involuntary unemployment, says spokesman Ken Mills. It will cover six monthly mortgage payments during a policy year. The coverage is available to borrowers who work 30 or more hours each week and are under 71 years of age.
Out-of-work jitters involve not only the loss of pay but the loss of company-sponsored health benefits. Under COBRA, you are entitled to keep your coverage whether you quit or are fired for any reason other than “gross misconduct.” The employer can charge you only the cost of the coverage plus a 2 percent administrative fee.
“Most people don’t take advantage of what COBRA allows, because they simply don’t have the cash to pay the premiums,” says Wayne Stoltenberg, second vice president of specialty products at Time Insurance in Milwaukee.
A cheaper alternative is to purchase short-term insurance. Time Insurance is one of many that offers coverage you can buy for a short period-anywhere from 30 to 185 days. The one-time cost for six months of coverage for a healthy 30-year-old male living in the Evanston-Skokie area or Oak Brook, says Stoltenberg, is about $292.
Some coverage is better than none, Stoltenberg notes. But the problem with short-term policies is that they don’t cover costs on pre-existing illnesses. So if you have a chronic condition, you need to keep up your former employer’s program.
In addition, notes Stoltenberg, short-term policies must be renewed if you need longer coverage. If you have developed a condition during the first short-term policy period, you probably will be denied coverage again.
