Travel Insurance Worth it? No.

There are generally two elements to travel insurance – cancellation coverage (you get your money back for non-refundable deposits if you have to cancel for covered reasons) and interruption coverage (the cost to get home if you have to cut the trip short for covered reasons or extra costs due to airline issues along the way). Generally one policy covers both of these things.

And if you book a trip through an online travel agency, or even possibly through your airline’s website, you’ll probably be offered travel insurance.

If you’re booking a trip through a travel agent, they will probably recommend travel insurance. But is it a good idea?

Why Do Travel Agents Recommend Trip Insurance?

There are basically three reasons why travel agents recommend trip insurance:

1. They make money selling the insurance. The average commission for selling travel insurance is over 40% and go up from there. There’s a financial benefit to the agent who sells you insurance through a third party insurer.
   
2. It protects the agent from liability. Agents fear that something will go wrong along the way during your trip, and since they advised you and set it up you’ll go after them — that it will be deemed their fault — and they’ll be out of pocket (or have to make an insurance claim themselves). If you have travel insurance, the claim may be paid by the insurer — from coverage you’ve purchased. And Just as importantly, if they advised you to get insurance and you didn’t follow their advice, how can it be their fault when you’re out of pocket?
   
3. They think it’s a good idea. Despite conflicts of interest in the first two reasons, some agents still believe it’s a good idea. And for some people, in certain circumstances, it may be. Read on.

What Is Insurance For?

Traditionally insurance helps you avoid risk of loss that would be substantial to your personal circumstance. A properly run insurer diversifies risks, rather than taking on all one sort of risk, so that they aren’t financially harmed in a material way when paying out claims. An insurance company gets paid to take on risk and by taking on different kinds of risk in different places they’re able to manage that risk. And you pay them to do so — you know that a small amount of money protects you from significant loss.

There are plenty of things that are often called insurance and sold as insurance that don’t really make sense as insurance. The typical dental insurance policy can really better be thought of as ‘prepaid dental services.’ You get a couple of cleanings a year. You get some benefit for major work but the policy usually pays out only half the cost on expensive procedures, and it’s common to see benefits capped at $1500. In other words, that’s the most you’ll ever get from your policy in a year. Rather than insuring against financial ruin, the company is paid to cover your dental procedures up to a specified amount but no higher. They make money on the people who never use it. The biggest benefit to dental coverage (besides that it represents tax-free compensation) is access to negotiated, in-network rates rather than protection against financial ruin.

Similarly buying a policy that will cover you for a hotel night if your flight is cancelled, or cover the cost of replacing your underwear and swimsuit if your baggage is delayed. People do get payouts on these things, but the maximum benefit is going to be pretty limited.

So You Think Something Bad Might Happen, Is Insurance Worth it?

Much travel insurance falls within the same category of coverage as a policy to protect your cell phone or the kinds of electronics you might pick up at Best Buy. There’s a reason the sales folks are so aggressive, the company makes big money on it and the commissions are good.

But that doesn’t mean you won’t ever come out ahead. Some people do drop their phones and get covered through the policies they’ve purchased. On average the insurer makes out, not the customer, but that doesn’t mean no one gets their money’s worth. Just that most people don’t.

Still, a simple calculation might suggest it’s worthwhile. If a typical claim would be for $500, and the policy costs you $100 (over the period of time you’re paying for it, perhaps $4 a month for 25 months and ignoring time value of money), you might that you’ll come out ahead f there’s a greater than 20% likelihood that you’ll make a claim.

And it feels good to be covered. No one likes fear of loss. Plus we notice the $500 loss, we may not feel the $4 a month.

Even so the calculation isn’t so simple. You pay out your $100, and then it turns out you have a claim. It isn’t all that seamless to get paid most of the time. I made a successful claim last year when my cell phone screen cracked (after I dropped it on the sidewalk). You can read about the hoops I had to jump through to get a pay out. There was plenty of paperwork, lots of reasons to deny the claim along the way, and persistence was necessary for the policy to pay off.

There’s a cost to the time, and some measure of likelihood that a policy won’t pay, that has to be factored into the equation. In other words, there’s a discount for reliability risk and customer service risk on the part of the insurer (they make more money when they don’t pay), and even for the insurer’s stability (will they be able to pay in the event of a claim).

Understand What Isn’t Covered

Travel insurance policies are rife with exclusions — often for “pre-existing conditions” (and you get to argue with an insurer later over what those might be, especially if you buy a policy some amount of time after booking a trip where it could look like you’re doing so because you know of a potential existing problem). They also may carry exclusions related to the very sorts of reasons you want to have coverage for, such as a family member’s medical emergency rather than your own, or for an unexpected work obligation that forces you to cancel a vacation.

Policies have different sorts of covered events. If something happens that isn’t listed in the policy, typically the policy won’t pay.

Travel insurance does not mean “protection against any unfortunate circumstance that may arrive” unless the policy explicitly says so and without exclusion. Those policies will, naturally, be more expensive.

What Kind of Coverage Do You Have Already Without Buying a Policy?

Before traveling internationally, it’s a good idea to find out what kind of coverage your health insurance provides. The policy I have through work covers me abroad in a substantially similar way to how it would at home. Not every policy necessarily does, and if yours doesn’t you may want coverage for health abroad.

I also mention that one should insure against catastrophic events. If medical evacuation isn’t covered by your policy, and the cost is something that would cause financial hardship, then “MedJet Assist” or similar offerings may be for you if you’re going to travel somewhere that you won’t have access to state of the art medical care. Medical evacuation from remote locations is certainly something to consider if your standard policy won’t provide for it.

And the advice that private insurance coverage often includes coverage for travel abroad specifically applies to US residents, but may not apply to residents of many other countries. It’s very common for non-US residents to have coverage – either privately or through government insurance – that won’t fully cover them abroad.

In addition to health insurance, may sorts of trip interruption and minor expense (hotel night due to irregular operations, lost luggage) coverage often comes from premium credit cards that you may have used to make your booking. Just as my Sapphire Preferred’s purchase protection paid the cost of a new screen for my phone when I dropped it.

Like many cards, Sapphire Preferred offers:

TRIP CANCELLATION INSURANCE*
Receive reimbursement for travel due to covered cancellations and emergencies when you purchase tickets with your Chase Sapphire Preferred® card.

AUTO RENTAL COLLISION DAMAGE WAIVER*
Receive coverage at no additional cost for covered damage due to collision or theft up to the actual cash value of most rental vehicles. Remember to charge your entire rental transaction to your Chase Sapphire Preferred® card and decline the rental company’s collision damage waiver coverage.

TRAVEL ACCIDENT INSURANCE*
Receive coverage while traveling for covered common carrier accidental death or dismemberment at no extra cost when you charge your travel fare on your Chase Sapphire Preferred® credit card.

TRAVEL AND EMERGENCY SERVICES*
Get help coordinating medical, legal and travel assistance services while you’re away from home.

LOST LUGGAGE REIMBURSEMENT*
Carry-on or checked luggage is covered if lost or stolen when you purchase your common carrier ticket using your Chase Sapphire Preferred® card.

TRIP DELAY*
When a covered trip is delayed more than 12 hours due to a covered event, expenses incurred as a result of the delay, such as meals and lodging, can be reimbursed.

Lots of conditions and exclusions of course, but that’s often the nature of the beast. (One such exclusion often found in credit card-provided coverage is that booking award tickets where you pay the taxes on the card may not generate coverage. Ask, and document the response, before assuming that it will.)

Who Should Buy Travel Insurance?

Cruises often involve substantial deposits or even full payment as much as a year in advance or more. So do safaris and other similar land packages. The fact that they can be both very expensive and also booked far off into the future means that there’s both significant risk of loss (big $) and substantial time during which to incur that loss (plenty of things can happen between time of booking and time of the trip).

So for folks where the loss is big enough, where they’ll really feel it, it makes sense to insure. If it’s a once in a lifetime trip, if it represents a substantial portion of one’s income, or heaven forbid if borrowing the money to take the trip (or if paying for the trip means not paying for something else if an important life event comes along) then by all means take the coverage.

On the other hand, if the amount of money are small, or risk of changing plans isn’t that great, or especially if you’re financially able to eat the loss if something bad comes to pass, then don’t “pass on the insurance” — instead think of yourself as “self-insuring.” You’re basically paying yourself for coverage (by not paying a premium to someone else), and if a cost or loss comes to pass so be it.

You’ll feel the loss. You’ll wish you bought the coverage. Because at the time you see the deposits flushed down the toilet or the extra money coming out of your pocket during a trip delay, but you don’t see the money you saved each time you didn’t buy coverage.

But most people who can afford to take the loss, especially for small losses and especially for trips that aren’t booked especially far out, likely come out better financially overall if they don’t buy that coverage.

Rather than the adverse selection problem identified by economists, that people who are most likely to need the coverage are the ones most likely to buy it, frequently the most risk adverse consumers are the ones most likely to buy coverage. And as much as buying insurance, they’re buying the comfort of knowing they won’t be out a lot of money when unforeseen circumstances arise. They’d rather be out a medium amount of money now instead.

Should YOU Buy Travel Insurance?

You know what? I don’t buy travel insurance. I don’t sell travel insurance. And I don’t actually proactively recommend travel insurance to my award booking clients. I probably should, in case something goes wrong with their flights I don’t want them to argue that I arranged the connections or recommended the airlines and routings (usually out of what’s available…) and thus should be as responsible as the airlines for any costs incurred during irregular operations.

So… if you’re booking an award ticket through me, I highly recommend you get travel insurance. Thank you!

Still, there are five reasons why travel insurance isn’t as good a deal as many people think.

• What company is providing the service? How reputable are they? Very few people comparison shop.
  
• How good a deal is the coverage – cost versus likely payout – there’s a reason the coverage is offered, which is because it’s profitable for the firm making the offer.
  
• It doesn’t protect what you think it does. There’s fine print as to what circumstances are covered (not all events you might think trigger coverage in fact trigger coverage), how much coverage is provided (whatever your out of pocket costs are vs a fixed amount per incident), and in what form it takes (cash refund vs travel credit).
  
• Followup to actually get a claim paid is costly — time submitting the claim, documenting everything correctly, following up to ensure payment. Sometimes more costly than the payout itself, but almost certainly when factoring collection costs into the risk-adjusted net present value calculation of whether to purchase insurance it tilts against the purchase.
  
• Insurance is something you buy against low-risk catastrophic costs you can’t absorb if they were to occur, not relatively low cost events like travel disruption (lost luggage, the need for an extra hotel night).

But if you’re going to buy coverage, and these recommendations are entirely anecdotal as I’ve caveated that I don’t buy it myself, I’ve heard very good things about both TravelGuard and InsureMyTrip.com.

Read the details of the policies you’re buying, make sure they match your needs (that you are covered for the risks you think you are covered for, don’t just assume “you’re covered against bad stuff happening), and be prepared for a claims process — paperwork, delay, and potential hassle — if you do indeed need to make a claim.

And if it’s a trip of a lifetime, real money on the line, and you’ll sleep more soundly with coverage, then by all means! Your travel agent will thank you for helping to take them off of the liability hook, and they’ll appreciate the commission.

Do you buy travel insurance? How easily has it paid out for you?