In most cases, travel insurance makes little sense. You want to insure against large losses, incurring which would be catastrophic. You don’t want to buy insurance against small losses, against those you ‘self-insure.’
And small losses are rarely worth the cost to recover, remember that a covered event doesn’t just generate a check, you have to navigate the bureaucracy of the insurer in order to obtain payment, which at the very least is going to involve filling out paperwork and waiting.
Travel insurers offer the policies because they’re profitable. Travel websites and travel agents sell them because they’re profitable to them, in fact commissions can exceed 40%.
Further, most of the benefits of travel insurance are relatively modest, it may not make snese to buy a policy on the chance you need to spend up to $200 on meals during your delay, or even with $10,000 in emergency medical coverage. (Check whether your existing coverage applies to your trip, it often does, and if you’re buying insurance it’s probably for peace of mind against ‘really bad things’ and for which $10,000 may not hack it.)
As Scott McCartney reminds us, travel insurance is rife with exclusions.
This week’s Middle Seat looks at the gotchas and pitfalls of travel insurance, including a chart with some recommendations on how best to protect yourself from particular worries. Standard travel insurance policies are heavy on exclusions –- reasons a trip gets canceled that aren’t covered. Unless you read those exclusions, you may be buying a policy that doesn’t cover the very instance you want covered.
Consider a travel insurance policy for a ‘trip of a lifetime’ that’s costing you in excess of $10,000 and being booked a year out. Although most folks booking such trips could and probably should self-insure (i.e. don’t buy the insurance, as if you’re booking $10,000 trips you can likely afford to do so more than once). But we often buy insurance for reasons that are not logical, calculating, but instead emotional.
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, it turns out frequently that the most risk adverse consumers are the ones most likely to buy it. 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.