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Related topics: insurance, policies, financial planning, health care, Liz Weston

A few years ago, pet insurance would have ranked right up there with life insurance for children and dread-disease coverage on my list of policies you don't need.

Now I'm not so sure.

I still believe most people are better off forgoing pet insurance and instead putting the money they would have spent on premiums into a savings account. Pet coverage can cost $2,000 to $6,000 over the life of an average pet, and the chances are slim you'll ever need to shell out that much for treatment.

But if you're the type of person who would do anything to save your pet, including spend thousands of dollars on medical care, pet insurance might be a preferable alternative to going into debt.

New treatments and monstrous bills

What's changed in recent years is the state of veterinary science, as well as the economics of running a veterinary practice. Vets today can offer treatments that were unheard of just a few years ago -- and at prices that could make you howl. Consider:

  • Treatments once reserved for humans, from radiation therapy to kidney transplants, are now available for pets. That means once-fatal conditions are now treatable at costs ranging from $1,000 to more than $5,000.
  • Vets have access to increasingly sophisticated and costly diagnostic tools, such as MRIs. Such screenings not only boost the cost of exams but often detect problems that once would have gone unnoticed and untreated.
  • These expensive tools and procedures have helped create health care inflation in the pet doctor world.

Of the estimated $45.4 billion Americans spent on their pets in 2009, $12.2 billion -- 27% of the total cost -- was expected to be devoted to veterinary care, according to the American Pet Products Association. That would be a 10% increase from 2008.

But pet owners with insurance are still a small minority. The American Veterinary Medical Association estimates that in 2007, 72 million dogs and nearly 82 million cats were kept as pets in the U.S. Yet there were only 850,000 pet insurance policies in effect that year, according to the National Commission on Veterinary Economic Issues.

Insurers have teamed with the American Kennel Club and Petco Animal Supplies to offer the insurance, and more than 1,600 companies -- including Office Depot and Google -- provide the coverage as an optional employee benefit.

Image: Liz Weston

Liz Weston

Deductibles, exclusions and surcharges

The oldest pet insurer, Veterinary Pet Insurance, has seen its revenue climb at an average annual rate of 26.8% since 1998. The company, which has about 71% of the U.S. pet insurance market, had gross sales of $149 million in 2007.

Pet insurance is far from a cure-all, though:

  • The policies typically have deductibles, co-pays and caps that limit how much will be paid out annually.
  • Pre-existing problems and hereditary conditions, such as hip dysplasia in retrievers and German shepherds, are normally excluded, although one insurer, Embrace Pet Insurance, covers hereditary and chronic conditions.
  • The older your animal, the more you'll have to shell out in premiums. Some insurers don't cover pets older than 9; others levy stiff surcharges.
 
A look at the most expensive common pet medical conditions
Dogs*Cats*
ConditionAverage feeConditionAverage fee
1. Intervertebral disk disease$2,8441. Foreign body ingestion (small intestine)$1,629
2. Lung cancer$2,0322. Urinary tract reconstruction$1,399
3. Gastric torsion (bloat)$1,9553. Foreign body ingestion (stomach)$1,391
4. Foreign body ingestion (small intestine)$1,6294. Rectal cancer$1,011
5. Cruciate rupture$1,5175. Bladder stones$989
6. Foreign body ingestion (stomach)$1,3986. Intestinal cancer$942
7. Cataract (senior)$1,2447. Hyperthyroidism (radiation)$920
8. Bone cancer$1,0598. Fibrosarcoma (skin cancer)$780
9. Pin in broken limb$1,0009. Acute renal failure$565
10. Brain cancer$91610. Mast cell tumors$497
* Treatment costs vary on a case-by-case basis. Dollar amounts reflect average initial claim fees submitted to Veterinary Pet Insurance and are not intended to suggest typical reimbursements, reflect average national veterinary fees or account for continuing fees associated with a particular condition. Source: VPI via Bankrate.com.

Going the distance for Fluffy

Because insurance is best used as protection against catastrophic expenses -- not those you could easily pay out of pocket -- the question becomes: How deep in the hole would you go for your pet? And then could you afford to pay those costs yourself?

 
Most common surgically removed items
1. Socks
2. Underwear
3. Pantyhose
4. Rocks
5. Balls
6. Chew toys
7. Corncobs
8. Bones
9. Hair ties / ribbons
10. Sticks
Source: Veterinary Pet Insurance

Pet insurance is a nonstarter for many pet owners, simply because they take a pragmatic approach to their animals. If the cost of treatment got too high, they would choose to have the animal put to death.

But many who think they'd draw the line at a certain dollar amount find their convictions wavering when the time actually comes, said Veterinary Pet Insurance's chief executive, Dennis Drent. The kids are crying, the vet says a treatment would be successful, and some parents break down and spend the money.

"It can be a very emotional situation," Drent said.

If you don't have sufficient savings to cover the treatments, you might consider pet insurance. But do your homework before you buy:

  • Shop around. Policies and premiums can vary widely. Take note of not just the monthly or annual cost but the differences in deductibles, co-pays and caps, which may limit payouts by incident, year or the animal's lifetime. Ask whether the insurer offers discounts for insuring multiple pets or whether your employer offers pet insurance as a voluntary benefit. The companies to check include PetCare Pet Insurance, 1-866-275-7387; Petshealth Care Plan, 1-800-807-6724; Veterinary Pet Insurance, 1-888-899-4874; and Embrace Pet Insurance, 1-800-511-9172.
  • Check with your state. Like human health insurers, pet insurers should be registered with your state regulators.
  • Scrutinize policies and understand their exclusions. The conditions most likely to afflict your pet are often the ones most likely to be excluded from a policy.
  • Beef up your savings. A Consumer Reports analysis found that pet owners with insurance may actually spend more over time on their animals than those without.

Whether you opt for pet insurance or not, you can help control how much your animal costs you. Here are some other ways you can trim vet bills:

  • Use low-cost clinics for shots. Your vet may host one or two such clinics each year, or you can call your local Humane Society chapter, animal control department or veterinary hospital for leads.
  • Get second opinions. You'll have time, with most conditions, to consult another vet before committing to expensive treatments or drugs. You also can consult The Merck Veterinary Manual online for a rundown on your pet's condition and recommended treatments.
  • Ask for samples. Your vet may have free starter packets of many popular medications. It doesn't hurt to ask.
  • Shop around for meds. You can call around to other vets, check out pet catalogs or search the Internet. DiscountPetMedicines.com has links to sites that offer lower-priced medications.
  • Don't cheap out on pet food. An investment in better-quality food can pay off in fewer health problems, particularly with cats, which can be more susceptible to urinary tract infections if fed inexpensive cat food. Check with your vet.
  • Keep their weight down. Just as with people, obesity in animals can trigger health problems.
  • Keep your pet indoors or on a leash. Free-running animals have more accidents, contract more illnesses and take a bigger toll on the environment than pets that are kept under control. (In other words, Fluffy will live a longer, healthier life indoors, and the songbirds of the neighborhood will thank you.)
  • Research before you buy. Next time you're in the market for a pet, remember that dogs tend to wind up in the vet's office twice as often as cats, making a feline the better choice for someone on a budget. Also, research the hereditary and chronic problems of each dog and cat breed you're considering, so you can have some idea of the potential vet expenses you might face.

After you're gone: Pet trusts

For those of you concerned that you'll someday leave your furry friend behind, most states now offer statutory pet trusts.

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Such trusts allow owners to direct and fund care for their pets. The owner names a caretaker, as well as a trustee to make sure the pet is cared for as the owner intended.

If you want to ensure that your pets keep getting the care they need when you're gone, talk to the financial planner or attorney handling your estate preparations. And be specific about your desires and the needs of your pets.

Drawing up a pet trust can set you back $500 to $3,000, depending on the document's complexity, according to Bankrate.com. But if you make your animal companions part of your overall estate planning, you can bring the cost down considerably.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.