Last week, our Joe Levi had one of those moments every smartphone owner dreads, where in just a split-second he went from having a beautiful new handset to an unusable mess of cracked glass. It need not go that way for everyone, and the death of your beloved smartphone can come just as easily from exposure to liquids. Maybe the most maddening situation is when it stops working without any obvious reason, and while you might be saved by your warranty in that case, chances are that your phone’s warranty is a whole lot shorter than how long you’ll actually end up owning it.
I noticed in the comments for Joe’s post about his misfortune that some of you were suggesting that insurance was the answer. Sure, that can ease the financial burden of replacing a broken phone, and depending on the plan you get, it can cover everything from accidentally damage, to loss, theft, or just that flat-out unexplained failure, acting like an extended warranty. Before you sign up for such coverage, though, I’d suggest you step back and think carefully about it, because the odds are not in your favor that smartphone insurance will save you money.
Why Bother With Insurance?
Why do we have insurance? For things like medical care, or automotive coverage, it protects us against potentially devastating bills. A sudden, severe diagnosis, or a tire blowing out at the wrong moment, can easily open you up to tens, if not hundreds of thousands of dollars in unexpected bills. Insurance gives us reassurance that, should something horrible happen, it’s less likely to end up bankrupting us.
But smartphones, as expensive as they can be, just aren’t going to deliver such financial hardships upon us. Maybe you don’t have the $600 or more for a new high-end device just sitting in your bank account, ready to be spent at a moment’s notice, but that doesn’t necessarily mean that breaking a costly phone creates a burden equal to its price tag. After all, you could always replace it with a lower-end device, or even go without a smartphone at all until you’re able to put the money together. So while there’s the potential that a broken phone might lead you to shelling-out the better part of $1000, something none of us would particularly like to do, it’s far from a situation where you’re compelled to pay that much.
That’s important, because we have to remember that companies providing insurance aren’t doing so out of the goodness of their hearts: it’s profitable for them. That means that, no matter what type of insurance we’re talking about, policy holders, as a group, will always pay more in premiums than the companies pay out in claims.
With those cataclysmically expensive categories, we’re OK with ultimately being on the losing end of the equation; even though it might end up being in our best interest to simply put that health insurance money in the bank, earn interest on it, and withdraw funds when needed, the risk that enough money won’t be there when we absolutely need it is just too great to live with. Essentially, we’re paying for peace of mind.
That just doesn’t make any sense in situations where we’re dealing with sums as comparatively small as we are with smartphones, and when there’s no obligation to immediately spend money.
You should also consider how the value of devices depreciates over time. Sure, a new Nexus 4 might cost $300 today, but if you break yours ten months down the line, you might be able to pick one up much more cheaply – and that’s just for a new replacement. More importantly, if you’re going to replace it with an equivalent item – that is, one you buy gently used, as your phone was up until the point it broke – you’re looking at even less money.
What Do the Numbers Look Like?
Sticking with the subject of the Nexus 4, let’s look at T-Mobile’s insurance offerings. It has a number of options, but the most affordable, which offers coverage for loss, theft, and damage, but not malfunction, costs $4.79 a month. On top of that, there’s a deductible that varies based on what model phone we’re talking about, and for the Nexus 4, it’s $130. That’s just today’s deductible, and on March 17 it goes up to $150.
Now, considering how little time Joe had his phone before breaking it, that sounds like a good deal, but most people who get insurance just won’t run into problems so quickly – like I said, if that’s what happened on average, companies simply wouldn’t offer insurance at all. If his phone broke after a year of ownership, the replacement would ultimately cost him $208. Yes, that’s less than $300, but will a new Nexus 4 even cost $300 by then? Perhaps more to the point, are you really going to want a year-old model, or are you going to wish you had saved that $208 to spend towards a brand-new, just-hit-the-market smartphone?
And that’s one of the better insurance deals. T-Mobile has another plan that covers malfunction, as well, which nearly doubles the monthly premium up to $7.99. Replacing a Nexus 4 after 12 months with that plan will ultimately cost the user about $245. And the kicker? For the period of time when your phone’s still under its original warranty (which is one year for the Nexus 4), which already covers those malfunctions, you’re paying that extra $3.20 a month for absolutely no additional coverage.
Those figures are going to vary based on carrier, sometimes the manufacturer offers it directly (like Apple and its AppleCare), and you can even get smartphone insurance from third-party agencies, but no matter which way you slice it, the average phone owner will always come out on the losing end of the smartphone insurance game. That’s just its nature.