Why Travel Insurance is Usually a Bad Deal

Via Wendy Perrin on Twitter, the New York Times has a column on one family’s difficulty securing a refund from a travel provider after purchasing insurance and needing to use it. In this case, the travel provider offered the promised refund in the form of a travel credit, which wasn’t useful as one of the travlers has since passed away. The family thought the coverage offered them a cash refund but the terms of the coverage in fact did not.

In this case I’m less sympathetic than the columnist and probably most readers. In the end it sounds like the family got cash, depsite the terms of their policy. And considering most of the travel insurance stories I’ve heard they were lucky to be offered travel credits.

Thus, let me offer Five Reasons Why Travel Insurance Isn’t As Good a Deal As You Think.

1. What company is providing the service? How reputable are they? Very few people comparison shop.  
2. 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. 
3. 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).
4. 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.
5. 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).