Should you consider pet insurance?

Americans love their pets. Two-thirds of U.S. households have a pet, and about one third own more than one. And just like us homo sapiens, our furry, feathered or scaled friends get sick or injured on occasion.

In general, paying the vet bill out of pocket is the most cost-effective way to cover medical expenses. But for many families, a major illness or injury to our pet would present a significant financial hardship. That’s where pet insurance comes in.

The first animal health insurance policies were written by a Swedish mutual cooperative in 1890, primarily to cover horses, cattle and other livestock. Another Swedish company issued a dog policy in 1924. Today, not only does this Scandinavian country provide universal health care for humans, but over 90% of Swedish dog owners purchase coverage for their four-legged companions. Even 60% of Swedish horses are in the network.

In 1980, American veterinarian Jack Stephens founded Veterinary Pet Insurance Co., the first insurer of its kind licensed by the State of California. Stephens sought to provide an alternative to euthanasia for pet owners who couldn’t afford expensive treatments. The company’s first client was an A-list celebrity: Lassie, or more accurately “Hey Hey,” the great-great-grandson of the original Rough Collie named Pal who first played the role in 1954.

To celebrate the occasion, Lassie appeared at a news conference with Los Angeles Mayor Tom Bradley in 1982. And yes, the dogs who portrayed the famous rescuer over the years were males, since female collies are typically smaller and have thinner coats that emphasized summer shedding. Veterinary Pet Insurance was sold in 2005 to Nationwide Insurance, which remains a major provider.

There are 85 million pet dogs and 60 million cats in the U.S., according to the American Pet Products Association. But in contrast to Sweden with its near-universal coverage, American cats and dogs are climbing trees and chasing letter carriers largely uninsured. The North American Pet Health Insurance Association, reports that only 4.5 million or about 5% of American dogs are insured, and 1.2 million or 2% of felines have their own insurance cards.

Most pet coverage looks like traditional human policies, with a deductible and fractional cost sharing. A standard policy might carry a $1,000 deductible and then cover 80% of the additional expenses up to a specified annual maximum, although different companies offer varying terms and premiums that allow you to customize your policy.

Most carriers place an age limit on coverage, and costs increase with age. Preexisting conditions are also excluded or subject to a waiting period. And just because you can obtain coverage today does not guarantee future insurability. Nationwide recently notified 100,000 customers that their furry friends would need to look elsewhere as they were dropping certain unprofitable policies.

According to the North American Pet Health Insurance Association’s 2023 report, average annual premiums for dog coverage range from $204 for simple accident insurance to over $1,200 for comprehensive coverage including wellness checkups. Grooming, paper training and Botox treatments are not included.

Pet insurance is a $4 billion industry in the U.S. and has grown at a healthy 25% compound annual rate over the past five years. Some carriers have moved beyond Fido and Kitty to write coverage on exotic animals including potbellied pigs, gerbils, cockatiels and even certain reptiles. As of this writing, ant farms and tarantulas are not yet eligible.

Assuming your little buddy is insurable, does it make sense?

All insurance is a tradeoff involving upfront costs to mitigate against the risk of a much larger loss in the future. Ideally, the premiums are forfeited, and the coverage is never needed. Yet some potential losses are so catastrophic that insuring them is imperative: think homeowner’s coverage or (human) health care insurance. Other cases lie closer to the margin and are less cost-effective if you can cover the expense out of pocket.

Consider the analog of an extended product warranty. Auto dealerships will recommend a service plan to cover major repairs, wrapping the cost into the financing contract. These agreements are a major profit center for the dealer since the odds of a transmission failure are low with a relatively new vehicle, so most consumers should say “no.” However, if you might have difficulty coming up with $5,000 to pay for a major repair, the additional monthly expense may be worth it to you, even if the odds are you’re wasting your money.

One might think of pet insurance in the same way. Clearly, it would be better to set aside some cash and invest in a high-yield savings account to pay for future vet bills. But if the prospect of a four-figure surgery would break the bank, basic accident and illness coverage might be worthwhile.

As an alternative, many veterinarians offer in-house financing to cover unexpected medical expenses if Spot eats a half pound of birdseed. Before investing in doggie insurance, ask your vet about options and interest rates to stretch out the cost and compare it with the monthly expense of insurance. You may find this a preferable path considering it would only come into play in the event of an illness or injury.

We love our pets and want to take care of them. Pet insurance is a viable option if a large out-of-pocket expenditure is not an option but consider the alternatives before you buy.

Christopher A. Hopkins, CFA, is a co-founder of Apogee Wealth Partners in Chattanooga.

    Christopher A. Hopkins