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Travel Insurance – Yes or No?
Some people swear by it, other people swear about it. But there
are many different types of travel insurance, some better than
others.
In part one we review the
different types and sellers of travel insurance policies; in
part two we look at the different type of coverage and protection
these policies offer you.
A Travel Agent Perspective
As a former seller of travel, I definitely loved travel
insurance – not so much for the commission I earned from selling
it, but rather because of the way that it could transform a
desperate and sometimes tragic problem into a resolved
situation.
I remember one time being telephoned, in the middle of the
night, from a small out of the way island off the Australian
coast. The caller was a client, in tears due to learning about
the sudden death of his mother. I was able to say to him ‘Don’t
worry about a thing, Paul; simply go to the airport tomorrow
morning and there will be tickets waiting for you to get you and
the rest of your family home as quickly as possible’. The cost
of urgently returning home, and the cancellation fees for the
rest of their vacation, were all absorbed by the travel
insurance.
Another Travel Agent Perspective
As a travel wholesaler, we sold travel insurance through travel
agents. One time I had a travel agent call me - also in tears.
It turned out that she had neglected to offer travel insurance
to a client, and now he was threatening to sue her and her
agency if they didn't refund him the costs that would otherwise
been covered by travel insurance. He said 'if you had offered it
to me, I would have bought it, and because you didn't offer it
to me, you should be liable'.
For this reason, travel agents should be sure to always offer
their clients the option of travel insurance.
Different Sources of Travel Insurance
There are many different sources for travel insurance policies,
with different implications for their value and their coverage.
Some sources are very much better value than other sources.
Wholesale or Retail Insurance
When you buy any sort of travel insurance, the premium you pay
gets allocated several different ways. Some of it goes as
commission to the person selling it to you. Some of it goes to
cover the administration costs of creating your insurance policy
and recording it. Some of it goes as profit. And some of it goes
to actually cover the risks you’re insuring against.
You want as much of the money you pay as possible to go towards
actual coverage, and as little as possible to be allocated
towards the other things. Let’s guess how a typical $50 premium
gets spent – something between $5 and $15 is selling commission,
another maybe $5 goes towards promotion and other selling costs,
then perhaps $20 goes towards administration, maybe $5 for
profit, and that leaves something between $5 and $15 for actual
risk coverage – not a large percentage of your $50 payment, is
it!
However, if you bought the policy as a 'wholesale' policy, the
$20 administration cost reduces down to maybe $1 or less, which
means that the $5-15 of actual risk/benefit coverage increases
up to $25-35 – more than double the coverage, compared to a
'retail' policy. If at all possible, you want to be buying a
wholesale rather than retail cover.
What is the difference? A retail policy is where you fill out a
special insurance application form, and send off a payment to
the insurance company, and get a certificate of insurance back
from them.
A wholesale policy (which also is sold through travel agents) is
where a tour operator or wholesaler groups together many
insurance sales. You still get the chance of buying insurance
along with the rest of your travel arrangements, you pay the
premium along with the rest of your travel costs to them, and
simply get a pre-printed generic policy document and perhaps a
voucher from the tour operator.
This way the insurance company has almost no administrative
overhead – it simply gets a statement once a month from the
wholesaler listing the people that they have sold insurance to
and sending a check for the net premiums; all the insurance
company has to do is bank the check (well, at least until you
make a claim!).
'Real insurance' or Supplier's Self-insurance?
If you are buying
travel insurance that ultimately comes from a travel
insurance underwriter, that is a 'real' insurance policy. But
some tour operators and cruise lines will offer their own
'house' insurance policies. Often, all these policies protect
you from is from that company's own cancellation fees if you
cancel your travels. This type of insurance can be very limited
in its coverage, and while it might be less expensive than a
comprehensive policy, it is rarely a good value.
The most extreme form of this in-house insurance is seen when
rental car companies try and sell you their insurance coverages
at rates typically ten times or more higher than you would pay
through a commercial insurance company.
Annual or Single Trip Policies
Most travel insurance is
offered as a single trip policy that covers you for your one
particular upcoming trip. However it is possible to
buy annual cover online that provides cover to
you – potentially for as much travel as you might do during the
entire year.
This is another form of ‘buying in bulk’ and the value tends to
be very much greater in an annual policy than in a single trip
policy, although the biggest factor here is how much travel
you’re likely to do in a year. If you’re only going to travel
once or twice, single policies are better, but if you have a lot
of travel lined up in the next twelve months, check out an
annual policy as a possible alternative.
Primary or Secondary Cover
This is an important point of distinction. Primary cover means
that the company offering it will ‘pay first’; secondary cover
means that they will pay second (or last), only after you’ve
claimed as much money as possible from any other insurance you
already have.
The important difference is most clearly illustrated with car
insurance. If you have a $5000 claim, you don’t want to have to
use your regular, at-home, auto insurance because they might
then increase their rates and you lose your ‘good driver’
history with them. If the travel insurance policy has primary
cover auto insurance, then you don’t need to do anything to mess
up your regular auto insurance at all; but if it is secondary
cover, the travel policy won’t do anything until after you’ve
gone to your regular insurer and got as much as you can from
them.
Needless to say, primary cover is better than secondary cover!
On a similar concept, some insurance companies will pay claims
direct to whoever it is that seeks payment, others require you
to pay yourself and then seek reimbursement. This is not
necessarily always up to the insurance company – sometimes
people will want to get money direct from you rather than trust
on a faceless insurance company in another state or country to
pay them, but where it is an option, you’d obviously prefer the
insurance company to directly pay rather than to have to suffer
the cash-flow consequences of making large payments yourself
with reimbursement to follow who knows exactly when.
Read more in Parts 2 and 3
Part 1 of a series on
Travel Insurance - please
also visit
1.
Travel Insurance - Yes or No
2. What type of travel insurance do
you need
3.
Ten things your travel insurance may not cover
Related Articles, etc
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Originally published
11 Oct 2002, last update
21 Jul 2020
You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.
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