Is Overdraft Insurance Protection Worthwhile on my Checking Account

Overdraft protection is a form of insurance that means that your monthly overdraft payments will be covered in the event that you have an accident, injury or become ill. We’re all used to the premise of arranging insurance cover when we take out a mortgage or a personal loan, but it’s used less commonly for overdrafts.

The main advantage, then, of taking out overdraft protection is the peace of mind of knowing that your overdraft will be paid off should something happen to you that would otherwise prevent you from funding the repayments yourself.
A secondary advantage, that is linked to this, is the fact that it will prevent your credit score from deteriorating. Falling into an unauthorised overdraft position will incur you lots of (usually very expensive) charges and will put a black mark against your name on credit reports. This may be particularly important, in the current credit crunch environment, if you are thinking of applying for a mortgage.

Having stated the advantages of overdraft protection, it’s worth pointing out that it will not be appropriate for every checking account/current account customer. Indeed, it could be argued that it will only be a small sub-set of these customers who stand to gain from overdraft protection. If you very rarely make use of your overdraft facility or don’t have an overdraft facility, then the chances are that you don’t need it. Similarly, if you are disciplined in paying off your overdraft balances promptly and have reserves of savings, then you may well feel comfortable to do without insurance cover.

The people for whom insurance protection may be most appropriate are those who regularly find themselves in an overdraft position, sometimes go into an unauthorized overdraft position and who aren’t confident in their ability to cope should they become incapacitated.

The negatives associated with overdraft protection that are most commonly cited are its expense and the fact that you’re paying for something that you may be unlikely to ever use. On the cost side of things, you will need to weigh up the cost against the potential value. Sometimes, the cost goes up depending on how large your overdraft is so that’s worth bearing in mind as well. On the likelihood of ever needing to use the cover, it is a fact of insurance that we buy insurance hoping that we will never have to use it but glad to have the peace of mind of knowing that we’re covered should the worst happen.

In the current turbulent economic climate, I think we may see an increase in people making use of overdraft protection. However, it is important to note that there will be a substantial amount of people for whom insurance protection isn’t essential. You therefore need to consider whether you are someone who is likely to run up a big overdraft which could prove problematic to reap in the event that you were struck down by illness or injury.