How does travel insurance work?

Insurance has been around in some form for many centuries. There is documented evidence that Chinese and Babylonian traders protected themselves from risk as far back as the third century B.C.

The reason we have insurance is because we like to offset the potential for big financial losses. We buy homeowner’s insurance to cover our home and the stuff inside it in case it’s destroyed by a fire, for example, and we need to recover our loss. You won’t have the same items you had before, but you’ll be able to replace what you lost to a certain extent.

Here’s how travel insurance works.

Travel Insurance covers Travel Losses

Travel insurance is a specific type of insurance designed to cover the losses a traveler may experience. Some of the potential losses for a traveler include pre-paid travel costs like airline tickets, hotel reservations, and cruise payments. Other losses may include the unexpected expense of emergency medical treatment, an evacuation off a mountaintop, or the cost required to recover a dead traveler’s body.

See What does travel insurance cover? for more details.

The Principles of Insurance are the Same

Travel insurance works on many of the same principles of other insurance plans: the traveler pays a small amount to cover their risk, and the insurance company takes that money and holds it or invests it. Lots of travelers paying in means the travel insurance company can pay out when a particular traveler experiences a loss.

How Travel Insurance Premiums are Determined

Travel insurance premiums (the amount a traveler pays) are determined by risk factors. The typical risk factors that influence travel insurance premiums are:

• the age of the traveler,
• how much the traveler is spending (and would therefore stand to lose),
• and the traveler’s destination

Travel insurance premiums for an older traveler spending a lot of money on a open-water diving trip, for example, would be higher than the travel insurance premium for a young student going abroad to study at university. The greater the risk, the higher the premium.

See How much does travel insurance cost? for more details.

The Plan Outlines the Coverage

When an insured traveler encounters a travel disaster and files a claim with their travel insurance company, the company reviews what happened and applies the coverage rules to determine how much the traveler should receive to compensate their loss. The rules of the travel insurance policy vary from plan to plan and this is where travel insurance is a little different than other types of insurance.

Many travelers make the mistake of assuming that their travel insurance plan will cover anything that happens on their trip, but that’s not true – it’s not even how insurance works. If the loss that occurred isn’t listed in the policy, then the claim will not be covered.

Here’s an example: If your travel insurance plan covers trip cancellation losses except in the instance of terrorist acts and you cancel your trip because of worries over terrorist attacks, you won’t receive reimbursement for that loss.

See What Travel Insurance Does Not Cover for more information.

To Summarize …

Travel insurance plans specifically outline what is and is not covered, so it’s important to review your plan carefully to understand your coverage. Understanding the exclusions of your policy is just as important as understanding the coverage.

See our Travel Insurance 101 for 8 steps to understanding travel insurance. Also, see our steps to 100% confidence in your travel insurance plan for hints on how to review your plan and ensure that you have the right coverage.