There I was, minding my own business, when I got an email from my pet insurance company notifying me that my pet insurance premium would be going up. I scrolled down to see by how much, and was floored – my premium was set to triple.
I have had two policies with the same company since my husband and I adopted our two rescue mutts ten years ago. One of my pups recently passed away (RIP Proxy), so I am down to just the one dog and policy. Frankly, I haven’t paid much attention to it as I have really only ever had one claim that would entitle me to any reimbursement. But this premium increase took my “latte a day” insurance premium and turned it into an “avocado toast a day” proposition.
Financial planner me clicked into gear. Is the policy worth keeping?
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By the Numbers
I decided to start with seeing how much I have paid into the policy, and how much I have gotten back. Since I am a data evangelist, I have all of my spending data for the last 13 years, and this was an easy exercise.
Total Premiums Spent Since 2015: $13,237
Total Reimbursement Received Since 2015: $5,540
Net Cost of Insurance: $7,697
Ouch. Don’t even get me started on what that money would have grown to if it had been invested.
Understanding the “Why” Behind Insurance
Insurance is meant to be coverage for low probability, high risk scenarios. As a general rule of thumb, you want to insure the things that would be catastrophic for you to replace. Things like protecting your residence (home insurance), your future income (disability and life insurance), and risk management (umbrella insurance) tend to be recommended uses for insurance.
It all boils down to one question: If something happened to whatever you are insuring, could you afford to replace it? If the answer is yes, you may consider skipping the insurance. If the answer is no, then consider getting insurance at the highest deductible you can reasonably afford. For many people, home insurance is a wise purchase, while cell phone insurance and a warranty on your microwave may not be as necessary. You get the idea.
Emotions and the Sunk Cost Fallacy
Emotionally speaking, it’s easy for me to want to keep paying existing premiums because of all the money I have already put into the policy. But what you put in already is irrelevant – it’s a sunk cost. I need to think of each additional premium dollar on its own.
If I have to pay $250/month going forward, how big of a financial hit do I need to experience to even be made whole, let alone profit from this insurance? Do I expect to get over $3,000 in benefits back a year going forward? And how many more premium increases will I be slapped with as my sweet German Shepherd continues to age?
Building Your Insurance Slush Fund
I feel confident in paying for future vet bills for my now ten year old dog. I will not pay for any procedure that would diminish his quality of life. I take a page from Being Mortal by Atul Gawande (a book I highly recommend) and want to focus on quality of life vs. a prolonged life.
But I also know that having insurance operates like a peace of mind for when those costs pop up. To give myself peace of mind to spend what I need to on my dog, I will be building a pet insurance slush fund with the premiums I would have been giving to the pet insurance company. For some people, a well-funded emergency fund will do the trick, and you needn’t bother with a separate account.
If the time comes when my Hudson needs care, I’ll turn to that fund first. If he ends up passing peacefully and there is money leftover, I’ll use those funds to throw him one heck of a celebration of life party.
Not a Racket, but Not for Everyone
People who love their furry creatures but don’t have the dedicated funds to pay for a major medical procedure would be wise to consider using pet insurance while they build up their emergency fund. Others may find the peace of mind of having it and may feel it’s worth more than any out of pocket premiums could cost.
But if you look at the hard numbers, you might find, as I did, that it is no longer a needed part of your insurance portfolio.
