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How does travel insurance work?

Confused about what travel insurance does? Find out how travel insurance works and what it covers.

Travel insurance is a safety net for travellers. It provides cover for the risks we face when we travel and protects us against the losses we can incur if the unexpected happens. Common travel risks include medical emergencies, trip cancellations, and lost or damaged luggage and personal effects. Depending on the level of insurance you purchase, your policy can cover all of these and more.

Apart from medical emergencies where immediate payment may be required, travel insurance works like most other forms of insurance, where you pay upfront and are reimbursed by your insurer at a later date after lodging a claim. As with other types of insurance, making a claim involves providing documentation as evidence of your loss and following the correct procedures regarding deadlines and disclosure.

This guide explains in detail what travel insurance is, what it covers, why it’s so important and answers the question: How does travel insurance work?

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What does travel insurance cover?

There are three main areas of risk that travel insurance covers: medical emergencies, trip cancellations, and lost or damaged luggage. The benefits listed here are typically included in a comprehensive travel insurance policy:

  • Overseas emergency medical assistance. This includes emergency medical treatment and medical evacuation (usually via the insurer’s emergency assistance provider).
  • Overseas emergency medical and hospital expenses. This includes overseas hospital treatment and accommodation.
  • Cancellation fees and lost deposits. This includes reimbursement of lost deposits and cancellation fees for prepaid non-refundable travel and accommodation.
  • Travel delay expenses. This includes reimbursement of meals and accommodation expenses due to a delay in your journey.
  • Luggage and personal effects. This includes reimbursement for lost, stolen or damaged luggage and personal effects.
  • Luggage and personal effects delay expenses. This includes reimbursement for purchase of essential items if your luggage is misplaced by a carrier.

In the case of emergency medical treatment, hospitalisation and evacuation, an upfront guarantee of payment will usually need to be obtained from your insurer or its assistance provider.

If you lodge a claim for cancellation cover, the insurer pays the difference between any refund you obtain from the vendor and what you originally paid for the trip.

In the case of lost, stolen or damaged luggage and personal effects, the success of your claim will depend on whether you can supply sufficient supporting evidence such as police reports, proof of ownership and evidence that the incident was not due to your own negligence.

Many comprehensive travel insurance policies also offer a number of other benefits that are either included as standard or available to purchase as optional extras. These can include:

  • Accidental death. A benefit is paid if you die due to an injury sustained on your journey.
  • Permanent disability. A benefit is paid if you are permanently disabled due to an injury sustained on your journey.
  • Hospital cash allowance. A daily payment is offered to cover incidentals while you are in hospital.
  • Alternative transport expenses. You will be reimbursed for travel expenses incurred to reach an event on time if your prepaid travel arrangements are disrupted.
  • Hijacking and kidnapping. You will receive a payment for each day you are held captive if you are kidnapped or your vehicle is hijacked.
  • Travel documents and travellers cheques. If these are lost, stolen or destroyed, your insurer will cover replacement costs.
  • Theft of cash. This includes reimbursement for stolen cash, postal orders or money orders.
  • Rental vehicle excess. This covers the excess payable in the event of theft or damage of a rental vehicle.
  • Extreme sports and activities. This covers a range of adventure activities, although high-risk pursuits often require additional cover.
  • Personal liability. This covers your legal liability if you kill or injure a third party or damage their property.

Purchasing travel insurance

When shopping for travel insurance, purchasers are faced with a number of choices including:

  • Single trip or annual multi-trip cover
  • Individual or group cover
  • A standalone policy or the complimentary travel insurance provided with many credit cards

Let’s look at these questions on a case-by-case basis:

Single trip vs annual travel insurance

The answer to this one is relatively straightforward. If you travel infrequently, as in once a year or less, then single trip cover is all you need. You can take out cover for up to 12 months (up to 18 months with some backpacker insurance policies) and your trip can contain multiple destinations, as long as they form part of a consecutive journey that ends back in Australia.

If you are older or have pre-existing medical conditions, you will also have more luck getting cover under a single-trip policy, as insurers generally don’t cover pre-existing conditions under annual multi-trip policies. The maximum age limit is also lower than it is for single-trip policies. Although you can take multiple trips in the course of a year, annual multi-trip policies limit the duration of each trip to a maximum of 90 days.

So if you make a lot of short trips in the course of a year (such as business trips), then an annual multi-trip policy will be more convenient and better value for money than a single-trip policy. Otherwise, there is no discernible difference between a single-trip and annual multi-trip policy.

Individual vs group cover

If you’re travelling with up to 12 other people, whether it’s family, workmates or friends, a group policy will secure you a much better rate than an individual policy. It’s much more convenient in terms of applying for cover or making a claim. If you’re travelling as a family, a group policy will also usually cover dependent children for free.

The downside of group policies is that older members of the group or those with pre-existing medical conditions may not qualify for inclusion. If you wish to partake in any extreme sports or activities on your trip, you may need to purchase additional cover.

Also, conditions and exclusions may apply to each member of the group. If one member fails to declare a pre-existing condition or behaves in a manner that voids your cover, everyone in the group will be penalised.

Standalone vs credit card cover

The complimentary travel insurance that comes with your credit card can save you money if you use it in lieu of a standalone travel insurance policy, but it’s important to be sure it provides you with adequate cover against all the main risks. Many credit card policies come with conditions and exclusions that can severely limit your level of cover.

When considering credit card insurance, be sure to read the fine print regarding the excesses you will have to pay, the benefit limits, the maximum trip duration and the percentage of your trip you must pay for using your credit card.

If you have any pre-existing medical conditions, you may find that credit card insurance won’t cover them at all, so be sure to read the product disclosure statement (PDS) carefully. If you find the few dollars you save isn’t worth the risk of being underinsured, consider taking out a standalone policy instead.

Getting the right cover

Now that we’ve looked at the different types of travel insurance that are available and the kinds of circumstances in which they provide cover, let’s recap what you should be looking for when shopping for a policy.


A travel insurance policy must include:

  • Overseas medical, hospital and repatriation
  • Trip cancellation, delay or curtailment
  • Missed departure due to circumstances beyond your control
  • Lost, stolen or damaged luggage and personal effects


A good travel insurance policy will also include:

  • Emergency dental treatment
  • Personal liability cover
  • Death and disability benefits
  • Reimbursement for lost, stolen or destroyed cash and traveller’s cheques
  • Replacement of lost, stolen or destroyed travel documents
  • Cover for losses incurred due to an act of terrorism
  • Cover for rental car excess


The ideal travel insurance policy will also include:

  • Cover in the event of travel provider insolvency
  • Complimentary winter sports cover
  • Complimentary extreme activities cover
  • Cover for a greater number of pre-existing medical conditions

Why you need cover

To illustrate why everyone should have travel insurance, let’s look at each of its must-have components:

  • Emergency medical, hospital and repatriation. This is absolutely critical when travelling overseas, particularly to countries like Japan and the USA where healthcare is extremely expensive. Hospitalisation can cost as much as $5,000 a day and medical evacuation can cost $10,000 or more. Not having health care means you would have to pay these bills yourself, which could result in serious financial hardship.
  • Trip cancellation. Most people book and prepay their flights, accommodation and tours prior to departure, and this can add up to many thousands of dollars. If you are forced to cancel your trip and you don’t have travel insurance, you could lose up to half of the cost of your trip if you cancel a few weeks before you leave and 100% within a week of departure.
  • Lost, stolen or damaged luggage and personal items. This is one of the most common travel insurance claims. Without it, you won’t be covered if an airline loses your bags or someone walks off with them at some stage during your travels. Being stuck in a foreign country with no ID or money can be a frightening prospect.

How to compare policies online

The fastest and easiest way to compare travel insurance policies is online, where comparison websites bring all the major insurers together for you to compare their policies, saving you hours of research time. Things to look out for when comparing policies online include:

  • Are the must-haves such as medical, cancellation and luggage included?
  • Is the insurer reputable? Does it have a good history of paying claims and providing overseas assistance? Does it have good customer reviews or business ratings?
  • What are the excesses and how large are they?
  • What are the benefit limits? Are they high enough for your needs?
  • What are the exclusions? Are there any that limit your level of cover?

How to make a travel insurance claim

If you ever need to make a claim against your travel insurance policy, there are several things you will should do to increase the chances of your claim being successful. These include:

  1. Notifying your insurer as soon as possible (each insurer has different deadlines, so read your PDS).
  2. Providing the necessary documentation along with your claim form (such as police reports and proof of ownership).
  3. Follow your insurer’s instructions, which may include submitting t to a medical examination or providing further documentation if requested.
  4. Be honest with your insurer and provide as much information as you can.

Find out what are the most common travel insurance claims

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So that’s it in a nutshell: how travel insurance works, what it covers and why we should never leave home without it.

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