5

A local railway company partners with an insurance company and offers insurance policies as paid addition to railway tickets.

A random monthly salary in this region is an equivalent of seven hundred USD. A typical ticket costs between five USD and one hundred USD. An insurance policy costs an equivalent of two USD (actually slightly less but whatever) and it's in effect for the whole time of the travel confirmed by the ticket the policy was sold for - it starts when the passenger enters the departure station and ends when he leaves the destination station. That's usually something between two hours and two days of travel.

In case of passenger death caused by accident while the policy is in effect the coverage is equivalent to twenty thousand USD (ten thousand times the policy cost). In case of injury caused by accident while the policy is in effect the coverage is something like up to four thousand USD and that's for a serious injury, some minor injuries coverage is much smaller.

When a policy is being sold by the railway the latter serves as an agent and so it gets a bonus for every policy sold. The insurance company also needs to pay salaries, rent and a lot of other expenses not connected to passengers being killed or injured. The insurance company also needs profit.

So for each policy the premium is notably less that two USD. It's perhaps one USD or even less. Which means that risk of death during a travel is lower than one to twenty thousands. Meanwhile risk of death in car accident is estimated at about one to five thousand for a whole year.

It sounds like one'd be better off buying a lottery ticket which costs two USD and maybe wins twenty thousand USD and doesn't require winner death.

Does such insurance make any sense or is it just wasting money for passengers?

  • What country is this about? – quid May 25 '17 at 16:47
  • @quid It's somewhere in Very Eastern Europe. – sharptooth May 26 '17 at 8:38
5

Some countries don't have robust life insurance markets. Some countries have horrible travel fatality statistics. Some countries don't have very good liability law enforcement.

Is $2 on top of a train ticket in the US to send your family a $20,000 payment if you die on the train worth it, probably not. The fatality rate is pretty low here, lots of people have their own life insurance, and the US justice system carries a big liability stick.

If you're moving around on trains a lot in other countries where the fatality rate is much higher, you can't buy life insurance on your own, and the legal system doesn't punish negligent operators it might be meaningful, especially for frequent travelers who have dependents.

Is buying this coverage a reasonable and cost effective way to insure a person's life, no, clearly not. You're buying a policy to insure your life against being mauled by tiger in New York on a Tuesday, when you've never seen a tiger and don't live in New York. Obviously, if you want life insurance you would not buy coverage this narrow.

Personally, I think this is really akin to an impulse buy candy bar at a checkout line of a market. They're dangling this in front of you for an amount of money that's insignificant because some people will pick it up without thinking about it. They're tickling your fear of death just enough to get a dollar from you, but not enough to keep you off the train. And obviously the math works out for the insurer or it would not be offered.

Separately, regarding probability, it's not about an incident occurring in a train, it's an incident occurring in this particular train on this particular day/time. If there's a 1 in 10,000 chance of dying on a train in a year the chance of dying on a particular train on a particular day is likely to be one in billions or more. This really isn't about whether or not this coverage is valuable given the risk, it's about whether or not they can get you to impulsively spend a dollar.

2

In general, insurance is a net good for you when it covers catastrophic losses that you would otherwise be unable to properly pay for yourself. See more here: https://money.stackexchange.com/a/77570/44232. Of course, insurance is more valuable when the catastrophic event becomes more likely. The list of possible outcomes for this combination of expense + likelihood is below:

1) Unlikely event; minimal loss: Insurance has no value here; you will simply be giving money to the insurance company and never getting anything worthwhile in return. Example: insuring your car in Florida against hail damage.

2) Unlikely event; catastrophic loss: Insurance has some value; it is likely cheap to acquire due to unlikelihood of occurrence, and could reduce the possibility of unfortunate incidences from becoming life-altering. Example: insuring your car for an extra $1M liability insurance against possible medical expenses of those in an accident.

3) Likely event; minimal loss: Insurance has no value here - you will over the course of your life suffer many of these small losses, and by constantly paying insurance, you are on average losing money to the insurance companies. Example: insuring your toaster.

4) Likely event; catastrophic loss: While insurance would be valuable here, it is also going to be quite expensive. A better option may be to simply not participate in that activity. Example: insurance for participating in an unlicensed MMA fight.

Your specific question refers to what I would classify as #2 above - an unlikely event, but a catastrophic loss. This implies that insurance may be worthwhile, depending on the price and payout. The price itself seems small in relation to the cost of a ticket, and the payout seems high in relation to the cost of the premium.

But does the payout actually mean to you? It is perhaps not wise to consider life insurance as a 'windfall payment'. Instead, consider life insurance as coverage for the financial realities of death - funeral expenses, and perhaps money to provide grieving time for your family before they resume or take on work [Again, insurance is coverage against catastrophic loss, not a lottery ticket to provide a windfall when the unfortunate happens]. If you are the sole provider for your family, you may also want your insurance payout to be enough to resolve any outstanding debts you have outstanding [such as a mortgage], and/or substantially cover living expenses for your family for an extended period of time. A $20k payout would likely be far more than enough to cover funeral expenses, but may not be enough to set up your family to subsist without you as a sole provider.

Also consider that the chance for an accident may not seem particularly concerning while you are on the train in comparison to when you are jaywalking, or smoking the odd cigar, eating red meat, having a glass of red wine. What I mean is that there are many things in life which add some level of risk; not all of them are as obvious as a train ride, but there is always a chance of something unfortunate happening, even if you take reasonable precautions.

What these two considerations imply is that perhaps instead of insuring against this very specific incident, you instead purchase overall life insurance.

Rather than taking a flat payout amount, take enough of a policy only to cover the specific needs you expect - for many people, this is defined by the amount needed to cover funeral expenses only + possibly their outstanding mortgage balance. If you take the train often, your annual insurance premiums for a full insurance plan may be similar to your 'train only' insurance, while covering you in a wider variety of circumstances. Many people hesitate to think about purchasing not only life insurance not only because of the cost, but also because they do not wish to dwell on their mortality. But facing the subject head on may provide you with both financial and emotional peace of mind.

[And write up a will, while you're at it!]

1

Does such insurance make any sense or is it just wasting money for passengers?

As with most insurance, it depends. If you just look at the probability of a payout, the cost of the insurance, and the payout amount, then statistically it will always be better to avoid buying insurance. This is because there is a certain amount of overhead in an insurance company, like the commissions and salaries you mentioned.

The goal when buying insurance should be to avoid a cost that you cannot afford or is inconvenient to be able to afford. For example, if your family would be devastated financially by your death then it would make sense for you to buy some sort of life insurance. Whether or not this particular insurance makes sense for you depends on your financial situation and risk tolerance.

  • A person can accidentally die when not travelling and that could be devastating too. So that traveller insurance suggests that there're cases where a person would not have a term life insurance that covers him all the time but he would suddenly want this short term traveller insurance as if travelling by train was more dangerous than commuting across the town twice every workday. – sharptooth May 25 '17 at 15:05
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    Yeah I can't imagine many cases where someone wants life insurance and this train insurance would be preferable over a comprehensive life insurance policy. Maybe if a person doesn't do much in life except traveling via train and cannot afford a comprehensive policy. In general, it is a good idea to avoid extra insurances that are sold to you by companies other than an insurance company. – Nosrac May 25 '17 at 15:23
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    @DanielCarson Agreed - I would wager that if someone took the train 4 times weekly [two days of there/back, now looking at ~$20 USD / month in 'insurance premiums'], they would get a comparable life insurance policy covering basically all forms of death, assuming a reasonable level of health / youth. – Grade 'Eh' Bacon May 25 '17 at 17:03
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Your logic is correct, you are making a bet that pays 1:10K odds for $2. The likelihood of the event is certainly much lower, certainly several orders of magnitude lower (Probably around 1:10,000K). So it is a bad deal and yes it seems like a lottery ticket is a much better deal. Especially when you consider that you will be alive to enjoy the proceeds of the lottery ticket!

If you have the option of purchasing this insurance, don't.

If you need life insurance, then purchase it without conditions and clauses. Your dependents will need the proceeds regardless of how one passes.

  • 1
    I'd guess "The likelihood of the event is certainly much higher" should use "lower". – sharptooth May 25 '17 at 15:02

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