Phone Insurance – should I buy?
I used to automatically think “No – I’ve been alive longer on this planet without a cell phone than with one- and I could survive without my phone”- However, I question my previous methodology – there is too much emotional and qualitative factors in the old methodology to evaluate this purchase, and I should have been focused on the Expected value. That old thought process (my perceived asset value), along with my careful treatment of the phone always kept me from buying cell phone insurance. But I come across people all the time with the question “Cell Phone Insurance – should I buy?”
Now, I carefully review my needs and the expected value of the insurance and for a couple different reasons these factors have changed:
- the expected value of insurance purchase,
- my perceived cell phone value,
- my strategy is changing,
- risk management techniques have changed
- the asset value has gone up.
The invention of the cell phone has helped me save a tremendous amount of time and is freeing from the computer. The smartphone is no longer a nice to have it’s a need to have.
This freedom and power of the technology has increasing value for me as I get older. Individuals have to evaluate what is the value of their cell phone and is it worth more or less than the full retail value if you had to buy off the shelf.
As well as smart phones are adding features and getting more powerful – therefore also getting more expensive to replace/purchase.
But with this great asset comes an exposure to loss, damage , theft, etc.
My old strategy made me think I didn’t need to buy cell phone insurance, it included extra care, careful behavior, as well as retaining old assets for replacement and/or utilizing free upgrade from wireless carrier. However, this strategy is experiencing issues.
I used to carefully protect and care for my phone so that it would never get lost, damaged, or stolen. When it was new technology or new to me, the excitement of this device was a great risk management control. There is a phenomenon in which people may unknowingly provide more care towards new/exciting assets vs. older assets.
This behavior is best highlighted by children but applies to adults as well. Children’s favorite, most exciting, new toy doesn’t get lost, left behind, etc. as often as an old forgotten toy. Same applies to adults with their cell phones.
Overtime the excitement fades and so does the protectionist behavior for the asset.
Recently some wireless service providers have removed the “free upgrade” which was always another option to avoid buying the cell phone insurance, the strategy was to keep an older phone in the event that you lost or damaged your newer phone and wait until your Free upgrade.
This part of the strategy is also getting harder to achieve.
If you compare your thought process, compare how you feel about car insurance or another personal lines insurance to protect an asset, with your feelings about the utility of cell phone insurance it’s a good start.
However, feelings don’t validate purchase decisions for economist or statisticians – Expected value does. So each individual needs to understand the following:
- Causes and Likelihood of losing or damage to your cell phone
- Frequency of loss
- Cost of new phone
- Cost of insurance
- Verizon charges $10 per month for iPhone insurance coverage (which is covered under Asurion). This means that, during your two-year contract, you’ll be paying an extra $240 for the privilege of knowing that you can get your phone fixed or replaced for a fraction of the cost of a brand new iPhone.
- Expected value of insurance
- Evaluate the causes of loss, look at your frequency (1x every 2 years), x the cost of buying the phone outright (~$600 or whatever the phone costs) compare that value vs. insurance costs.
Do I buy?
Is $120 a year a good purchase? Really depends on who you are as an individual. Is your frequency of loss higher than average? Is there a co pay with each replacement phone?
Is there an opportunity costs associated with the $120 per year (Yes – how much)?
If your frequency of loss or damage is less than the costs of the insurance, can you self fund a replacement phone? See our discussion about pre-loss and post loss funding.
If the expected value of your insurance is positive, it should be something you consider. However, even if the EV is negative there are definitely other things to think of due to cell phone loss and what the cost of lost phone include:
- Back up information, contacts, using the cloud saves a tremendous amount of loss due to the loss of the physical device. But must be considered.
- Look at personal cyber insurance to protect the cloud and losses from cyber hack. Or the financial loss associated with losing a device or cyber attack associated.
- Do businesses have different needs related to buying phone insurance for corporate cell phones? What is the ERM associated?
Phone Insurance market
Public research estimates that the global mobile phone insurance market is expected to account for nearly $31 Billion in revenue at the end of 2015. The market is further expected to grow at a CAGR of nearly 10% over the next five years, eventually accounting for over $48 Billion in revenue by the end of 2020.
If you think about how many people have smart phone globally, value of the phone, insurable interest is billions, loss of use of the phone can be in the billions, or loss of data/pictures etc. not just the physical device loss.
With 7.5B people on the planet, I think the insurance industry is doing a good job protecting society for a cost of $6.40 per person (I recognize not everyone has a phone – just averaging for a basic societal cost).