What exactly is cell phone insurance, and does it make sense for most people to purchase it? The answer depends on your personal risk tolerance and lifestyle, but in most cases these insurance policies provide minimal value. This post walks through a personal case study to illustrate why insurance companies are typically the only ones who benefit from cell phone insurance policies.
Introduction
My iPhone stopped working out of nowhere this past weekend. And no, I didn’t drop it in a pool, run it over with a car, or put it in a microwave (you’d be amazed at some of he stories I’ve heard). Rather, as the Apple support team explained after examining my phone in the store, the sensors in the charging port were inexplicably damaged. I have no idea why or how this happened. The phone was three years old and well beyond the one year manufacturer’s warranty period provided by Apple.
I was out of luck…or so I thought. Reviewing my Verizon bill that Sunday, I discovered I was enrolled in Verizon’s “Total Mobile Protection” program. I felt disgusted that I’d been forking over an extra $15 per month on my phone bill for for three years without knowing. But I held out hope that the plan would solve my current issues. The terms and conditions stated my policy provided protection against “loss, theft and damage” as well as “coverage for post-warranty defects.”
Perfect, I thought. The plan even included an expedited next-day replacement phone. No sweat!
What a blissfully ignorant few minutes of positivity. As I soon discovered, electronics insurers are like casino pit bosses disguised in khakis and golf polos. These insurers study the behavior of consumers intimately, and play the odds to generate outsized benefits for themselves. Just like the casino, the the cell phone insurance company (almost) always wins.
Post Outline
Before diving into the nuances of cell phone insurance, this post addresses the concept of electronics insurance more broadly. Then, it analyzes the nitty-gritty numbers of these insurance polices through the lens of a personal case study. Finally, it concludes by highlighting some creative alternatives to cell phone insurance. I wish I knew about these possibilities before purchasing my own policy!
What is Cell Phone Insurance?
Overview
Most consumers believe that their wireless carrier provides their mobile insurance. This is understandable, considering the insurance cost is included as a line item on monthly phone bills and branded with a wireless carrier’s name. In actuality, coverage is provided by a third party insurer.
The cell phone insurance company that most of the large carriers use is Asurion. This company specializes in the business of insuring phones as well as a variety of other electronic devices.
While policies vary across mobile carriers, they all function similarly. Policyholders opt-in with their service provider and pay a monthly insurance premium of $12-$20 directly on their phone bill. In exchange, whether a phone breaks, malfunctions or disappears, Asurion offers a next-day replacement phone. Given the rapid rise in phone prices and the critical function phones serve, enrolling almost sounds like a no-brainer. The devil, however, is in the details.
The Fine Print
In addition to the monthly premium payment, consumers must also pay a “deductible” when filing a claim. The deductible amount varies by claim type and cellular provider, but my plan provides the following deduction amounts:
- $29 deductible for cracked screen repair
- $199 deductible for a replacement (due to damage, theft, or post-warranty defect)
These plans also place limits on the number of times that consumers can file claims. Policies typically limit consumers to 2-3 claims over a rolling 12-month period. As we’ll see later when we crunch the numbers, this point is crucial. The only people who truly benefit from mobile insurance plans are those who require replacement devices early and often. Insurers recognize this fact. They have cleverly capped their downside risk with this claim limit. In fact, cell phone insurance companies can also opt to remove frequent claimers from plans entirely.
Finally, these insurance policies expose consumers to replacement device uncertainty. While insurers generally aim to replace a device with a similar make, color, and model, there is no guarantee. The device may also be used or refurbished. Consumers hold no control over the device that arrives on their doorstep. Instead, the replacement gets determined by an insurance company’s warehouse stock.
“Asurion may fulfill claims with new or refurbished devices. You may also receive generic accessories…If the same make and model isn’t available, a similar make and model will be substituted. Color, feature and accessory compatibility aren’t guaranteed.”
Verizon Wireless insurance claim faq
My Cell Phone Insurance Case Study
I’ll do my best not to let my emotions cloud this analysis. But full disclosure, I had an absolutely terrible experience making my claim. Next-day delivery turned into a 72-hour delay. I spoke with customer service reps for 10+ hours. I traveled to an Apple Store. Then went to 3 separate Verizon stores.
This section is not, however, about my personal vendetta against insurance providers. Rather, it presents an objective analysis of the economic cost / benefit of a cell phone insurance policy. Just keep in mind that there’s also an intangible component to this equation. My service and claims experience was wildly more difficult and anxiety-ridden than walking into Apple and buying a new phone. For now, we’ll set that aside. Let’s take a look at the part we can quantify with a basic Excel model.
Cell Phone Insurance Plan Assumptions
These assumption figures represent the actual numbers from my situation. I purchased my 64gb iPhone X at the end of 2017 for $1,000. Three years later, at year-end 2020, I can buy the same certified refurbished model from Apple for $550. This implies that it loses an average of ~$150 in value per year (see “Annual Depreciation Rate”).
My plan required me to pay a $15 per month insurance premium ($180 per year). It also required a $200 deductible for any phone replacement claim.
Finally, the analysis assumes I could have generated 1% of post-inflation interest income annually. This means if I invested the money I spent on insurance premiums into a CD or other short-term savings vehicle, it could have yielded 1% annually. For simplicity, we’ll compound the interest on an annual basis. Note that I assume the total money paid towards premiums would have been invested initially. So if I held the policy for one year, I could have invested $180 in a one year CD. If held it for two years, I could have invested $360 in a two year CD, and so on. This represents the opportunity cost of cell phone insurance.
Cell Phone Insurance Economic Analysis
Let’s break down these numbers above. The “Net Consumer Economic Gain / (Loss)” shows the economic benefit or loss a policyholder realizes by filing a replacement claim. It takes the yearly value of an iPhone, then subtracts out total insurance premiums paid, deductible required, and the opportunity cost of paying premiums versus investing.
I’ve boxed my personal economic outcome in blue. After almost 3 years of responsible ownership, opting out of insurance would have saved me over $200. The intangible stress and aggravation associated with the claim process make the decision to insure look even worse. Driving immediately to an Apple Store and paying for a $550 replacement sounds ideal compared to my experience.
As the line graph illustrates, the breakeven point for my plan is between two and three years of ownership. Policyholders who pay for insurance beyond this point without making a claim lose money. The longer one holds insurance after breakeven without making a claim, the worse the economic loss.
Insurance Deductible to Value Ratio
At a fundamental level, people purchase insurance to protect themselves from the worst possible outcome. In some cases this insurance is well worth it. Yet I knew I “lost” by looking at my breakeven analysis.
I wanted a more concrete explanation for why cell phone insurance presents such a lousy value proposition. What distinguishes something like health insurance from cell phone insurance?
Enter a calculation I’ve coined the Deductible to Value Ratio (“DVR”). It allows policyholders to compare plans and make make informed decisions quickly. Calculate this ratio by starting with the deductible required to receive full coverage. Then, divide it by the value of the service or product the deductible covers.
The lower the DVR, the more value a plan provides to policyholders. Alternatively, the higher the DVR, the less value a policy provides. A 100% ratio implies a consumer could purchase a service or product on the open market for the same price. Since policyholders pay monthly premiums in addition to a deductible, they would experience significant economic loss at a 100% DVR.
Applying the Deductible to Value Ratio
In the world of cell phone insurance, the worst case is easy to predict. A device breaks and you must buy a new one. While inconvenient, this scenario isn’t catastrophic enough to create financial ruin in most cases. The relatively high DVR (see Excel model) illustrates this point. In year one, the DVR sits at 23.5%. Theoretically, it’s even higher than this because you could always replace an iPhone with a cheaper alternative. Over time, the DVR steadily climbs since the deductible remains constant, while the phone value plummets.
Contrast this with the DVR of average health insurance. Studies indicate that the average annual deductible for a single adult is ~$4,400. And the value of health service under a worst case scenario is virtually infinite. A policyholder might require chemotherapy for hundreds of thousands of dollars. Or an organ transplant which could cost over $1,000,000.
Applying the DVR, it’s easy to see why health insurance is much more valuable. For instance, if a policyholder paid a $4,400 deductible for a $1,000,000 transplant, the DVR would be a miniscule 0.4% compared to the 23.5% DVR of cell phone insurance in year one. While a transplant might sound unlikely, a single hospital stay can still cost tens of thousand of dollars. This keeps the DVR of health insurance extremely low, even for the healthiest of policyholders.
Alternatives to Cell Phone Insurance
If a consumer opts not to buy insurance, how else can they protect themselves? Here are a few of the most useful alternatives available. I wish I had considered these carefully before enrolling in my own cell phone insurance plan.
Physical Protection Accessories
The first option is to invest in a durable case / screen protector. I personally use this Speck model and have experienced great results. Many others swear by Otterbox which designs some entirely waterproof cases.
While no case will prevent damage under all circumstances, a case represents a cheap alternative to insurance that will likely extend a phone’s lifespan. Even premium cases retail for under $60-$70. This is about a third of what policyholders pay in premiums for a single year of coverage!
Credit Card Insurance Benefits
The second alternative takes things a step further. Some credit cards offer cell phone insurance policies as part of a wider benefits package. Card companies typically require consumers to pay their entire monthly phone bill with a given card to receive this coverage. Each program offers different terms and restrictions so always do your research to ensure you’re take full advantage.
We’ve talked separately about maximizing wealth with credit cards, and this idea aligns with that strategy. Many cardholders may not even realize that their card provides this cell phone insurance benefit. In fact, I am one of these people. I carried one of these cards for the full three years that I paid for Verizon’s insurance plan. I just never realized it! My Uber Visa card provides complimentary phone insurance as long as I pay my full mobile phone bill with the card.
By simply switching payment methods, I’ll save $180 per year. If I had a full family’s phone bill charged to my card, this benefit could be worth almost $1,000 per year. The icing on top? My deductible with this policy is a mere $15 compared to the $200 that Asurion charges. So my year one DVR could’ve been 1.5% versus the 23.5% DVR I experienced with Asurion. Win, win, win.
Concluding Thoughts on Cell Phone Insurance
I will never purchase cell phone insurance again. The breakeven analysis above illustrates why it’s mathematically a bad deal. And even if a policyholder “wins” by losing multiple phones in the first two years, the insurance provider can always remove them from the plan. The high DVR further highlights phone insurance’s inferiority relative to other types of insurance. These factors, combined with my horrendous customer service experience have convinced me to steer clear.
But as with any topic in personal finance, every situation demands a unique approach. Perhaps you place a higher value on the sense of security that phone insurance brings you. Maybe you believe my negative customer service interactions were rarities.
The goal of this post is not to make the decision for you. Instead, it’s to arm you with the data and perspective to make a more informed decision. Just don’t send those pit bosses disguised in khakis after Cash Snacks if (when) you decide to opt out of coverage!