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, that is, 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.
First Of All, 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, 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 cost 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 Do I Even 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, whether 1 day or 1 year, whether in the US or in 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 travelling 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 travelling to certain precarious countries where more problems may arise.
For personal travel, we would recommend travel insurance based on three factors – 1) the length/cost of the trip, b) whether the trip is outside the US, and c) the “type” of trip. If the trip is short/has a low overall cost (think a 5 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 US 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 travelling outside the US, 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 vs. 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, at which case you need to buy a policy that will cover this or add a rider).
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 simply 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 ACL, then find out that your knee has been excluded from medical coverage as a pre-existing condition due to knee surgery 5 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 travelling 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).
In the end, we are now believers that travel insurance, in many circumstances, is a very important investment. At the same time, we also realize that this is a very confusing area, and you may want some guidance. While we are not experts in travel insurance, we have read enough insurance contracts to ask the right questions and know what to look for. If you need any assistance, please feel free to reach out to either of us.
Karen DeRose and Anthony DeRose are registered representatives of Lincoln Financial Advisors.
Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. DeRose Financial Planning Group is not an affiliate of Lincoln Financial Advisors.