Nothing is guaranteed in life except death and taxes. This includes personal travel plans. Basic economy fares seem like a huge risk. You lose your entire payment if you can’t make the flight, which may be a few weeks or even months away. What do you do when you have to keep down travel costs but need flexibility?
Previously we recommended travel insurance for cruises. The typical cost for a $5,000 trip (cruise + airfare) for 2 for a week is $250 for travel insurance or 5% of total cost. Medical expenses are extremely expensive onboard and not covered by normal insurance. Even though the probability of an accident is very low, the expected net cost of having to file a claim is comparable to the cost of the insurance. Plus there are other insurance benefits
We didn’t look at the value of the CFAR (Cancel For Any Reason) insurance add-on for a cruise and will do so in a future post. It’s about $125 or 2.5% of total cost.
Today we focus on air travel and those nasty non-refundable basic economy fares. We wonder if CFAR insurance is a smart way to hedge against the possibility of losing your entire, albeit cheap, airfare.
Travel insurance typically covers sudden, unforeseen events that disrupt your trip, including trip cancellations due to sudden sickness, severe weather, or a family emergency. But life is more complicated than that. Maybe you have a big project for work, your mom suddenly announced she will be visiting from Boca, or you realize that Saturn is going to be squaring the moon.
CFAR is an add-on that lets you cancel your trip for any, including personal, reason. It typically reimburses 50% to 75% of your prepaid, non-refundable expenses, provided you buy the insurance within 14 to 21 days of your initial trip payment and cancel at least 48 hours before departure.
Note that your expense has to be a total loss. CFAR will not pay when the airline issues you a credit.
Let’s make some assumptions so we can look at the economics. Suppose that the basic airfare is $1,000 for your traveling party. Our CFAR policy will cost about $100 (or 10% of your trip cost) and cover 75% of a loss.
Airlines don’t provide a financial incentive to cancel a Basic Economy ticket. Most people simply don’t show up at the airport because they’re going to lose what they paid regardless. The airline industry average for no-shows is 10%. We’ll use that as a high percentage proxy for cancellation rates. We’ll also look at a low cancellation rate of 4% (one out of 25).
Here are your options and high and low average net loss.
$100/$40 - Do nothing. One time you’ll lose the entire purchase of $1,000. But this is spread across all the other flights where there is no other cost.
$125/$110 - CFAR hedge. You pay for the insurance policy on every trip and lose $250 on the canceled flights.
$150/$150 - Buy the airline upgrade, credit refund. Airlines also provide a ticket refund option for airline credit, which typically is $100 less than the cash refund below.
$250/$250 - Buy the airline upgrade, cash refund. The average premium for a typical Main cabin ticket over Basic Economy is $250 with cancellation with cash refund. This is a significant hike in the ticket cost, but also typically includes seat selection and other benefits.
Recommendation
Your choice depends on your preference for ease of mind and risk tolerance. I’ve only had 2 times during my life where I had to cancel or no show and lost my ticket payment. The low cancellation rate is based on that. But you may prefer ease of mind and the safety of insurance.
High risk. If you’re like me and accept the risk of eating the occasional ticket, book Basic Economy. It’s the clear economic winner.
Low risk. The top three options are in the same net loss territory and are all good economic choices.
Buy the Basic Economy ticket, especially if the trip is soon, or the travel is a virtual certainty. It’s still the lowest net loss option.
If you normally buy Main Cabin, which includes seat selection, regularly fly that airline and will accept a credit, or will pay a little extra for an easy and safe choice, then buy the Main Cabin upgrade.
For all other cases, consider the Basic Economy ticket with CFAR travel insurance. It provides peace of mind and includes travel insurance for flight, medical, and baggage emergencies. The downside is the hassle - you have to source and buy the insurance product and occasionally go through their claims process.
Background
Airfare pricing based on an American Airlines flight. Fare classes will vary based on airline and class packages.
Insurance prices and coverage will vary by trip, traveler, and provider. The data used here is an average from lower-priced quotes (but not the lowest) from those provided by John Hancock Silver, Tin Leg Gold, Travel Insured FlexiPAX, WorldTrips Elevate, battleface Discovery, Travelex Ultimate, Seven Corners Trip Protection Choice, AXA Assistance Explorer Elite. The following sites list and/or compare CFAR policies - InsureMyTrip, TravelInsurance.com, Squaremouth, Forbes Advisor, U.S. News & World Report