Image: Dog © Alley Cat Productions, Brand X, Corbis

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.