How Does Pet Insurance Work?

It functions more like property insurance than health insurance.

According to the 2019-2020 American Pet Products Association (APPA) National Pet Owners Survey, 67% of U.S. households own a pet, which equates to nearly 85 million homes.

These households spent a total of $97.1 billion in 2019 and $103.6 billion in 2020, with that number projected to rise to $109.6 billion in 2021. Veterinary care was the third-largest category of pet owner’s spending in 2019, amounting to $29.3 billion and $31.4 billion in 2020, it is estimated to grow to $32.3 billion in 2021.1

Americans have taken notice of the rising cost of veterinary care. More than 3.1 million pets were covered under a pet insurance policy in 2020 in the U.S., at a collective cost of $1.99 billion. It’s a relatively new industry: It wasn’t until that famed canine Lassie first received a pet insurance policy in 1982 that pet insurance became a formalized option.2

Still, according to Rick Faucher, president of the board of directors of the North American Pet Health Insurance Association (NAPHIA), since 2014 “our industry has experienced double-digit increases, with the U.S. average annual growth rate coming in at 22.6%. All indicators point to continued growth in our sector even in 2020, despite some COVID-related challenges our market and others continue to face.”

Finding the best pet insurance depends a lot on what your pet situation is and what kind of coverage you’re looking for. Despite its growing popularity, only 20 companies offer pet insurance in North America in 2020, and 97% of them are NAPIA members. Here’s what you need to know.

Advantages of Pet Insurance
You love your pet like a member of the family, but the insurance industry sees Fido or Fluffy more as property. That’s why pet insurance functions more like property insurance than health insurance. Still, before you remind somebody that your pet isn’t a piece of property, understand that this designation works in your favor. Reading and comprehending the policy is a cakewalk compared with health insurance policies written for humans. Consider these advantages:

  • Choice of Vet: As long as the vet is licensed, pet insurers won’t tell you whom you can and can’t see. There are no out-of-network doctors such as those your own health insurance policy probably dictates.
  • Simple Policies: Most companies have only three tiers from which to choose. There is accident-only, or basic, coverage; accident and illness, or comprehensive, coverage; and wellness coverage, which is for preventative procedures.
  • Cheap Premiums: Insurance costs vary with coverage and policy but, in general, wellness coverage costs $20 to $25 per month, accident-only coverage runs $11 (for cats) and $16 (for dogs) per month, and accident and illness coverage averages $29 (for cats) and $49 (for dogs) per month. Of course, the cost depends on a host of variables, including breed and age of the animal, where you live, and the options you choose as part of your policy.

If you understand insurance-speak, you can figure out a pet insurance policy. You will pay a monthly or an annual premium, you have to pay a deductible (a certain amount before the policy kicks in), and you may have a copay. Deductibles can range from $0 to $1,000 and co-pays range between 10% and 30% of the cost.

There is one major difference compared with many human healthcare policies. The first person to pony up the money is you—not the insurance company. In other words, as the sign at some doctors’ offices says, “Payment is due at the time of service.” After you pay, you file a claim with your pet insurance provider and wait for a check.

Some veterinarians may allow you to forego payment until the insurance company pays its portion. However, before you agree to that high-dollar procedure, make sure you’re clear about the method of payment.

Is There Pet Insurance for Exotic Animals?
If you own a nontraditional pet, your choice of insurers might only be one or two. In fact, dogs represented 82% of all policies in the U.S. in 2020, while cats accounted for the remaining 18%, according to a survey done by

If you have a bird, an iguana, or another kind of pet, check out Nationwide pet insurance, which is probably the largest and most well-known provider of exotic pet insurance.

What to Watch for
First, if your pet has preexisting conditions, your policy won’t cover them.11 If your animal has abdominal pain, for example, some companies may try to limit coverage on any condition that lists abdominal pain as one of its symptoms. Before saying yes to a pet insurance policy, talk to the company and have it clarify how it decides what constitutes a preexisting condition. Something in your pet’s medical records that is harmless may become a big deal if you later file a claim. On a related note, you may have to get your pet checked out by a vet before getting coverage if it hasn’t been seen by a vet in more than a year.

Next comes the waiting period. You can’t take out pet insurance when you learn that your pet requires a costly procedure. Insurers know that trick. That’s why they instituted waiting periods, which vary by state but will generally be 24 to 48 hours for accidents, and from 14 days for an illness to one year on certain medical conditions, depending on the type.

Ask about maximum payouts. These might include maximums per incident, per year, or over the life of the policy. Generally, the highest-level policies have the highest payouts.

Finally, most policies will increase your premium to account for rising costs and the condition and age of your pet. However, some companies do not. Ask about rate increases before signing the policy.

Is Pet Insurance Worth the Cost?
According to one well-respected consumer magazine, the answer is it depends. In 2105 Consumer Reports looked at policies from three major insurers in the pet insurance industry—Embrace, Healthy Paws, and Trupanion—and compared them with a lifetime of vet bills for Guinness, a 12-year-old Labrador mix from Westchester County, N.Y., and Freddie, a nine-year-old mixed-breed cat from Fairfield County, Conn. The magazine found that for Freddie, who was reasonably healthy, only one policy would have paid out more than his healthcare cost. However, for Guinness, who was diagnosed with skin cancer, all three plans would have been worth it.

The informational website in 2017 found that pet insurance for wellness care isn’t worth the cost. According to the report, the cost of routine care is usually negligible, especially early on in the life of a pet, and the yearly insurance cost is more or less what you can expect to pay directly to a vet.

Remember that pet insurance, or any insurance for that matter, isn’t designed to turn a profit (other than for the insurer). You purchase insurance to protect against catastrophic events and shouldn’t expect to make money.

Key Takeaways:

  • Pet insurance functions more like property insurance than health insurance.
  • Unlike health insurance, the policyholder must pay for their pet’s healthcare directly, then be reimbursed by the insurance provider.
  • Pet insurance never covers preexisting conditions.
  • Pet insurance is usually only financially rewarding in the event of serious health mishaps that bring steep veterinary bills.

The Bottom Line
When something really bad happens, insurance is worth the years of premiums you paid. For routine or relatively minor problems, you’re probably better off-putting the monthly premium into a kitty or doggy emergency fund to pay for those unexpected bills. If you elect to purchase pet insurance for catastrophic care, get the highest deductible you can comfortably afford.

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