How Does Pet Insurance Work?

According to the North American Pet Health Insurance Association, there are 179 million pets in North America that create an estimated $58.5 billion in annual spending. Vet care is the third largest expenditure in the category, costing pet owners about $15.25 billion per year.

Americans have taken notice of the rising cost of veterinary care. More than one million pets are now covered under a pet insurance policy at a collective cost of $595 million. 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. Since 2009 the industry has grown an average of 13.2% annually;  from 2012 to 2013 there was a 14.6% increase in active policies. 

Despite its growing popularity, finding information on pet insurance isn’t easy since only a handful of companies hold nearly 90% of market share. Here’s what you need to know.

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. But before you remind somebody that your pet isn’t a piece of property, this designation works in your favor. Reading and understanding the policy is a cakewalk compared to health insurance policies written for humans. Consider these advantages:

1. You can choose your vet. As long as the vet is licensed, pet insurers won’t tell you whom you can and can’t see. There are no in- or out-of-network doctors like those your own health insurance policy probably dictates.

2. Simple policies. Most companies have a small number of tiers to choose from. One may cover only accidents, another may cover accidents and illnesses, and a third provides more coverage for more conditions.

3. Premiums are relatively cheap. The average monthly cost for a dog with the lowest tier policy was less than $14 per month. The top plan averages $98 monthly. Of course, 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. Cats are even cheaper.

If you understand insurance-speak, you can figure out a pet insurance policy. You will pay a monthly or annual premium, you have to pay a deductible (a certain amount before the policy kicks in) and you may have a co-pay. Annual deductibles are generally low – between $100 and $250 – and expect your co-pay to be no higher than 30% of the cost in the worst-case scenarios. 

There is one major difference compared to 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. But before you say yes to that high-dollar procedure make sure you’re clear about the method of payment.

Your choice of insurers might only be one or two. In fact, dogs alone represented 90% of all policies in the Americas in 2013 – the latest data available. Cats accounted for most of the remaining 10%.

If you have a bird, iguana or other pet check out Veterinarian Pet Insurance, (VPI) a division of popular insurer Nationwide. It’s probably the largest and well-known provider of exotic pet insurance. 

First, if your pet has pre-existing conditions, your policy probably won’t cover them. 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 pre-existing 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 seen a vet in more than a year.

Next, waiting periods. 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. Waiting periods 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 for the condition and age of your pet. However, some companies do not. Ask about rate increases before signing the policy.

According to one well-respected consumer magazine, probably not. Consumer Reports looked at policies from the three insurers that hold a collective 90% market share in the pet-insurance industry and compared them to a lifetime of vet bills for a 10-year-old beagle living in New York in relatively good health.

The magazine found that none of the nine policies would have paid out more money than the total amount in premiums that the owner would have spent.

But when Consumer Reports added some hypothetical and costly health conditions into the mix, it reported that that “some policies” did return a positive payout.

In the case of cats, CR looked at a kitten with a heart condition that cost about $7,100 and a 10-year-old cat that required $9,000 of treatment for cancer. In both cases, having pet insurance would have saved the owners money.

The report also found that pet insurance for wellness care isn’t worth the cost. According to the report, it’s probably better to pay for routine vet care out of pocket.

But 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.

The verdict, as with most types of policies: 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. For more information, see Top Tips For Cutting Pet Care Costs and What You Need To Know About Pet Wellness Plans.