We recently met with a couple who was telling us about their
recent vacations. It turned into “National Lampoon’s Vacation.” Everything that
could go wrong did (the entire family getting gravely sick, broken bones, trips
to foreign hospitals). Luckily, my clients always make a smart decision before
they travel - they purchase travel insurance. They hammered home the idea that
we should also consider travel insurance not only for our other clients, but
for our own trips.
We will be perfectly honest. Up until this point, we never
considered travel insurance when we travel. It never really crossed our minds.
As financial planners, we are constantly insisting that our clients protect
against a loss of life, income, etc. Why wouldn’t we want to protect against a
financial loss due to a work/personal trip? While our clients were very
persuasive, we needed to do additional digging into this topic and whether the
costs of such insurance are worth its benefits.
What is It
and How Much Does It Cost?
Based on our research, trip insurance can differ
dramatically from policy to policy. However, the most comprehensive coverage will
reimburse policyholders for loss of nonrefundable, prepaid travel expenses,
including airfare, cruises, tours and hotels, resulting from cancellations due
to illness, injury or a death in the family, or trips interrupted for specific
reasons listed in the policy.
Some of the most generous types of policies will allow you
to cancel up to 24–48 hours before the trip for “any reason” (of course, you
will have to pay extra for this rider). Some policies also have what is called
“travel delay” coverage, which covers the cost of extra meals, hotel stays and
other expenses from flight delays and missed connections for listed reasons,
such as bad weather, natural disasters or acts of terrorism. Such provisions
are not carte blanche, there is a per diem limit.
The cost can vary dramatically depending on several factors,
but there are four main factors which influence price. One very large factor is
your age. Policyholders who are older than age 55 tend to pay more right off
the bat, as there is a higher incidence that they will use the policy for
health-related expenses (and generally have more pre-existing conditions, which
may/may not be covered by the policy). Even if they are covered, be prepared to
pay significantly more.
The second variable that will affect premiums is the cost of
the trip. The higher the cost of the trip, the higher the cost to the insurance
company if the trip is cancelled within the policy’s provisions. Another
variable is the length of the trip. The longer the trip, naturally, the higher
the chance of utilizing the policy.
The final factor is something I mentioned previously—how
comprehensive of coverage you want and what additional riders you want to
include. All in all, very basic travel insurance may be 2%–4% of your travel
cost, whereas travel insurance with all the bells and whistles can cost you up
to 8%–12%.
Where to
Begin?
Before you even begin looking into travel insurance, you
need to have an understanding of what type of coverage you need and whether it
is even necessary to begin with. Some agents will say that you should cover
every trip you take, whether business or personal, one day or one year or
whether in the U.S. or India. First, if you are constantly traveling for
business, the hope is that your company will foot the bill for any travel
insurance. If not, and you are constantly traveling for work, the cost can get
out of hand very quickly. In this case, we would pick and choose our battles
and perhaps only obtain travel insurance for travel outside the country or for traveling
to certain precarious countries where more problems may arise.
For personal travel, we would recommend travel insurance
based on three factors: the length/cost of the trip, whether the trip is
outside the U.S. and the “type” of trip. If the trip is short/has a low overall
cost (think a five day trip to Disney although even that can cost quite a bit
nowadays), you can probably do without travel insurance and “chance” it. If you
are considering a two week trip in the U.S. or intend on splurging, the financial
hit to your pocket will be substantially higher if you had to cancel. This may
be a good time to obtain trip insurance.
If you are traveling outside the U.S., we would consider
travel insurance. There is a higher chance that your trip will be longer/more
expensive, and as a result there is generally a higher incidence of use of
travel insurance for foreign travel, notwithstanding the potential larger
out-of-pocket healthcare costs you may incur (more on this below).
In regards to the type of trip, we would consider what types
of activities you will be doing on the trip. There is a much greater need to
insure your travel with adventurous activities versus more leisure activities.
For instance, if you plan on hiking to the summit of Mount McKinley, there is a
much greater need for travel insurance than say if you were sitting on a beach
in Hilton Head. If you are taking part of an adventure/extreme sport, you
absolutely need to make sure your travel insurance will cover this and does not
specifically exclude such activities. Many do, in which case you need to buy a
policy that will cover this or add a rider.
What Do You
Need?
Let’s say now that you do in fact want to obtain travel
insurance. How do you know what you will need? At this point, it makes sense to
get the opinion of a specialist in this particular arena. We would not rely on
a travel agent or a generalist, since you want someone who understands the
contracts very well and who has experience with the carriers. You also do not
want to buy travel insurance from the same company that is running your
vacation experience. If you buy a Carnival Cruise and buy travel insurance from
Carnival, if they go under, so goes your travel insurance.
Common sense is the key when working with an unfamiliar insurance
agent. First, do your own homework on the policy he/she is recommending. Google
information on the specific policy to uncover any warts/pimples, and quickly
skim the contract to see if you notice anything different from what your agent
is telling you. There are a few great online tools which will help you compare
policies (Insuremytrip.com and SquareMouth.com). One of the biggest potential
problems comes from not understanding whether pre-existing conditions are
covered by your policy. The last thing you want is to tear your anterior
cruciate ligament, then find out that your knee has been excluded from medical
coverage as a pre-existing condition due to knee surgery five years ago.
Second, ask your agent whether there are any additional
riders on the policy, and ponder whether
you want to pay extra for such riders. Are you paying extra for coverage in
case you were to be in the middle of a terrorist attack? It can also go the
other way. What if you wanted the ability to cancel your trip for any reason
and it forgot to be included? Again, common sense.
However, if you are traveling abroad there are a few steps
you can take to make sure you do not overpay or are over insured. The first is
in regards to your health insurance. We recommend taking a look at your current
health insurance coverage and determining if there is any health coverage for
overseas travel. If there is, you may need to read the fine print to determine
the specifics. How does the deductible change when abroad? What is included/excluded
from coverage? The largest potential loss is from medical evacuations (i.e. if
you are traveling in a foreign country and you need to be flown to the U.S.
with a doctor on a private jet).
If you plan on driving a car while abroad, you should see if
you have coverage via your own car insurance. If not, many trip insurance
policies allow a rider to be added to protect you or you can purchase rental
insurance.