There’s an old saying – “Never ask a barber if you need a haircut.” The same can be said for travel insurance. If you’re asking the person who’s going to be making money on the sale, the answer will always be yes.
Do you need travel insurance? Like most things in life, it depends. However, I’m going to help you decide for yourself.
Types of Insurance
While necessary, insurance can be a little dry. Please bear with me as I run through the most common types of travel insurance – warning, you are about to enter a no-humor zone.
Trip cancellation/interruption insurance covers non-refundable expenses associated with a trip being canceled or interrupted. It is normally the most expensive portion of the overall travel insurance package. If you’re buying a la cart, it can be multiples of the other types of insurance.
Emergency medical covers emergency health care expenses while you’re traveling.
Medical evacuation insurance will cover the cost of evacuating you to a decent medical facility, and possibly home.
Travel accident insurance will cover you if you’re unlucky enough to experience death or dismemberment due to an accident.
Baggage protection covers the cost of your luggage and its contents if lost, stolen, or damaged. It will also reimburse you for essential items you may have to buy if your baggage is delayed.
Trip delay insurance covers the necessary expenses you may encounter if events out of your control cause your travel to be delayed. It will cover expenses such as accommodation, meals, and transportation.
Comprehensive travel insurance is coverage that wraps all, or nearly all, of these individual types of insurance together.
Cancel for Any Reason (CFAR) insurance is a supplemental option that can be added to a travel insurance policy. In the age of COVID-19, the merits of CFAR have become a popular discussion. CFAR will add about 40-60% to the cost of comprehensive travel insurance and will cover approximately 50-75% of the trip if used.
What Travel Insurance Do You Need?
There are financial risks and health risks to consider when buying travel insurance. Although the risk of losing money should be a concern, the risk of a medical emergency is paramount.
Emergency medical insurance is unquestionably the most crucial insurance to obtain for a trip as you’re not just exposed to a financial loss, but you may be putting your health at risk. If you have health care insurance, carefully read through the policy to see if you are covered, or call the insurance company and talk to a representative. If you’re not covered, emergency medical is critical. It also tends to be relatively inexpensive.
Medical evacuation insurance can be equally important. The more remote your vacation spot, the more crucial thisinsurance can be. You should also take into consideration the quality of medical care in the locations you’re going to visit. Medical evacuation insurance is often inexpensive and is highly recommended because, again, it’s your health that is at risk without it.
Travel insurance prices vary greatly and often range from 4-12% of the cost of a trip – not an insignificant number. How do you determine if you should splurge for the protection? Ask yourself these questions.
Am I already covered under existing insurance policies?
Check your health care insurance first. Make sure your policy will cover you based on your location and the duration of your trip. Many policies will only cover you for 60 days if you’re traveling outside of the U.S.
Homeowners/renters insurance will often cover your valuables while you are traveling. Check your policy for coverage limits while away from home.
Do I have a credit card that will cover me when traveling?
If you have a credit card specifically designed for travelers, it will likely have some level of travel insurance. The good ones will cover nearly everything.
For example, the Chase Sapphire Reserve card will cover you in the following scenarios: trip cancellation/interruption, baggage delay, trip delay, lost luggage, accidental death, emergency evacuation, and emergency medical and dental.
If you don’t have a credit card that offers these protections, consider snapping one up. They offer other valuable perks for travelers as well, such as airport lounge access, generous mileage rewards, and travel credit.
How often have I had to cancel a trip in the past?
Take an honest look at your travel history. How many trips have you had to cancel on short notice? Is it something that happens frequently? Or never at all?
I have been traveling extensively for over 25 years. A normal (non-pandemic) year averages three to four trips. I can think of only two or three trips during that time that I’ve had to cancel.
The more often you’ve canceled trips in the past, the more attractive travel insurance might be. If you’ve canceled very few trips in the past, the less travel insurance makes sense…
Are there reasons I might have to cancel this trip?
…unless you have reasons to believe circumstances have changed. A complicated life filled with a demanding job, and people that depend on you can make travel insurance more attractive.
Do you have loved ones that are elderly or in poor health? Do you have small children who have a sniffle after every birthday party they attend? Travel insurance starts to look more attractive if there is a higher likelihood that an event will arise and force you to alter your plans.
There are no guarantees that you’ll never have to cancel a vacation if you’re living a life with few potential conflicts, but you’re playing a game of percentages.
Is this an expensive, once-in-lifetime trip?
Are you embarking on an around-the-word, retirement cruise? Or did you grab a super-saver fare for the weekend to do some hiking a few states away? The more expensive your vacation, in relationship to your financial means, the more important travel insurance will be.
Am I losing sleep?
Travel is supposed to be fun. If you’re worrying, it is not. Throw out everything you read in this article if you will lose sleep without comprehensive travel insurance. Buy it and sleep well.
Only Cover What You Will Actually Lose
Many travel expenses will be refunded to you, whether you have travel insurance or not. Thanks to recent changes, airline tickets can often be rebooked for free. Hotel stays can generally be canceled without penalty.
Always pay attention to the cancellation policy of any pre-paid travel expense. There is often a substantial difference between the total price of a trip and the amount you might lose if you have to cancel.
Do the Math
Let’s say you have a vacation scheduled where you will lose $10,000 if it is canceled. A comprehensive insurance policy will cost you $1,000. Dividing $1,000 by $10,000 results in 10%. If you believe you have less than a 10% chance of canceling your trip, you should decline travel insurance as you will come out ahead over time.
This comes with a lot of caveats, however. The calculation above is rough and does not include deductibles. Also, it is impossible to calculate the odds of a canceled trip precisely.
Make sure you can financially afford the loss if the vacation does get canceled. Do you have an emergency fund that covers 3-6 months of your daily expenses? You should. Will your losses only be a small percentage of this fund?
If you will be financially crippled by a canceled vacation, then buying insurance is a smart move regardless of the odds. If the loss will be a small hit to your overall financial wellbeing, consider not purchasing insurance and self-insure the trip.
The recent pandemic sweeping the globe has even skeptical travelers reconsidering travel insurance. If this is you, double-check to make sure any policy you purchase covers COVID-19. And also, make sure you understand the situations in which it will cover you. Some policies only cover you if you are infected with the disease, not if an area you are traveling to becomes a hotspot, and you decide not to go. A better option might be to book everything on a refundable/exchangeable basis until things normalize.
CFAR is an alternative for skittish travelers who have high non-refundable expenses. Just keep in mind the substantial cost and limitations. It will only cover 50-75% of your losses, and there are constraints as to when it must be purchased and how soon before a trip it can be used. The Points Guy has a good article that describes the coverage in detail.
When booking a vacation, don’t immediately run out and buy comprehensive travel insurance. Carefully calculate the non-refundable portion of your vacation, analyze your current insurance policies for coverage, and consider self-insuring the financial parts of your exposure.
Above all else, a vacation is supposed to be fun and refreshing. If not buying a travel insurance policy is keeping you from enjoying your hard-earned time off, throw out all of the calculations, and buy a policy that will help you sleep like a baby.
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David Tuzzolino, CFA, CFP®, is the Founder and CEO of PathBridge Financial, a firm that specializes in providing comprehensive financial planning and investment management services for clients that are nearing retirement and love to travel.