Why I Said “Yes” … and then “No” to My Cell Phone Protection Plan

by Joe Plemon on November 15, 2010

Let me state unequivocally that I don’t do protection plans or extended warranties. Not for a television or a dishwasher or a vehicle. Instead of forking over an extra 5 bucks every month for everything I ever purchase, I smugly self insure by keeping my emergency fund intact. Besides, when Dave Ramsey says that 50 to 80 percent of extended warranties/protection plans go for commissions, I see opportunity. “Why not,” I ponder, “pocket that commission money myself?

Confession time

Now that I have thrown my shoulder out of its socket by patting myself on the back, I have a confession to make. When I recently purchased my new Droid Incredible (my first ever smart phone), I sincerely intended to nix the protection plan.  However – as I held that sleek new phone in my hand – well, here is what happened:

Sales Rep, “Sir, would you like to include the protection plan with your purchase?”

Me, “How much does it cost?

“7.99 a month. This includes all data restoration, an extension of the original manufacturer’s warranty, and basically anything that could happen to your new Droid.”

I suddenly had a flashback of a previous cell phone which had leaped off my belt holster to its death in our toilet. Then a vision of my new Droid laying dead in bottom of our toilet bowl. “Does the protection plan cover dropping the phone into your toilet?” I asked.

“Certainly. It covers any damage of any type. Even losing it.”

I felt myself weakening.  “So. $7.99 a month. That’s it?

“There will actually be an additional $90 if you need to use the plan. After all, this is a $600 phone. (pause) Should you choose the plan, you could cancel it at any time.”

Well…OK. Sign me up.” I eerily heard myself say, wondering if I was having an out of body experience.

A Day Passes

After I got home, I definitely had buyer’s remorse…not for the phone, but for the protection plan. I was ashamed of myself for acquiescing to purchase something I didn’t believe in.

Of course the nerd in me showed up so I ran the following analysis:

The key in figuring this plan (or any insurance plan) is to estimate if you would use it often enough to justify the expense. In this case, I am paying $8 a month plus an additional $90 deductible, so the break even equation to replace my $530 dollar (NOT $600), is:

(“x” months) ($8/month) + $90 = $530

The answer is 55 months, meaning if I use the plan in less than 55 months, I win.  If I don’t need it for 55 months, the cell phone company wins. Because I am not sure I can go 4 years and 7 months without damaging my phone, the protection plan starts to sound pretty good.

BUT

Three things:

  1. I am eligible for an upgrade in 20 months. At that time I can buy a superior new phone for around $150 (what I paid for my Incredible). So…my break even time now drops from 55 months to 20 months.
  2. If something happens to my Incredible in the next 20 months, I am not obligated to fork out $530 for a new Droid Incredible. I have other options such as buying a used one on Ebay or selecting a  less expensive model.
  3. This one is a stretch, but here it is: If you are part of a Verizon family plan (which we are) and if one of the other family members qualifies for an upgrade (my wife does) and if this family member is not interested in upgrading (my wife isn’t), that upgrade can be transferred to another line. In our case, IF I was to destroy my phone, I could use Jan’s upgrade to replace my phone at the discounted price of about $150. If she needs another phone before her new upgrade becomes available, we could pay retail for a much less expensive phone (she doesn’t have or want a smart phone).

So now my question is this:

Even if I ignore point 3 above … Can I go 20 months without destroying or losing my phone? If past history is any indication, yes. In the 8 years I have been using a cell phone, I have killed only one: the toilet incident. If I had been paying $8 per month that entire time, my insurance premiums would have added up to $768. Hmmm. I am thinking that being self insured is making more and more sense.

Update

I tried to cancel my protection plan online, but was not able to figure out how to get it done. Makes me wonder if they somehow want that cancellation to be a difficult task.  I then called the store and dealt with a sales rep who, after reminding me of how the plan works, cordially cancelled it for me.

Now that it’s done, I feel good about it.

I just have to make sure I keep my smart phone is smart enough to avoid the toilet.

Readers: Do you buy extended warranties?  If so, for what items?  How about cell phone protection plans?

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{ 11 comments… read them below or add one }

David November 15, 2010 at 7:35 am

My personal philosophy is that I don’t buy insurance or extended warranties for anything that I can afford to replace or could do without. My though is that these companies offer insurance and extended warranties to make money which means the odds must be in their favor. This means that in the long-run I would be better off not purchasing these add-ons. For cell phones I can afford to go on ebay and pick up a used phone if I needed to. I am more tempted for larger purchases but tend avoid those add-ons as well.

They would not be offering these services if they were losing money on them.

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Tim @ Faith and Finance November 15, 2010 at 7:50 am

I haven’t purchased any warranties for big ticket items: computers, iphone, car… I guess I’ve been lucky not to have needed the warranties, but that’s the argument AGAINST them I suppose.

Your reasoning is good about the phone warranty. Even more, some damages to smart phones (like screens or keys) can be replaced relatively inexpensively. An iphone screen can be purchased for under $30 and if you’re savvy, you can watch a few youtube videos to install it.

I think you made the right choice.

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joeplemon November 15, 2010 at 7:52 am

@David,
Well said. Your personal philosophy mirrors mine about extended warranties/protection plans. These companies are not dummies. They know that over the long haul, they will make money on these products. I wrote this post to show how, even though I know these things, I still weakened and bought their plan…before I came to my senses.
By the way, after my toilet bowl incident, I did exactly what you alluded to: I went on Ebay and found exactly what I wanted.

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joeplemon November 15, 2010 at 8:10 am

@Tim,
The key, I think, is to be realistic enough to know that even though you will sometimes need to cough up the money to fix or replace those items you are self-insuring, you will still be way ahead over the long haul by paying those premiums to yourself.

Good tips about such things as screens or keyboards. A person can learn how to do fix almost anything on youtube!

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joeplemon November 15, 2010 at 11:44 am

@Lauren,
As your story demonstrates, this decision varies from person to person, depending on the risk factor. When you replace three blackberries in one year, you can’t afford to NOT have the protection plan. Thanks for sharing.

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Evan November 15, 2010 at 4:10 pm

The only extended warranty I have is on my cell phone (HTC Hero), and I have already used it once. The way I came up with whether the insurance was worth it is determined whether I can get that specific phone (or a similar one) on ebay for less than the deductible.

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gholmes November 15, 2010 at 5:24 pm

Thanks for the laugh. My dear wife lost hers down an outhouse.

The 2nd time I tried washing her phone with a load of clothes. We went the ebay route and got the exact model for $34 and she was able to salvage the card in her old phone

Statistically in my household, my teenager has been the most responsible with cell phone, laptop and IPOD.

We are self insured for our electronic gadgets.

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joeplemon November 15, 2010 at 5:42 pm

@Evan,
Using your guidelines, I should buy the insurance for my phone because I don’t think there is any way to replace it for less than the $90 deductible. I hope, in my case, that I don’t need to.

@gholmes,
I’m glad you caught the wry humor in this post. You are the first to mention it. Outhouse … yech! I don’t even want to know if you tried to retrieve it. Could fall into the category of “too much information”.

Good ole Ebay… makes self insuring seem like a genius move at times.

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Chris H November 16, 2010 at 10:32 am

Oh, Joe, you are cracking me up…..I feel the EXACT same way about warranty & insurance plans…..yet I too bought one for my iPhone! And yes, I too had buyers remorse. I’ve sworn – never again!!!

I did have one experience of getting a brand new laptop nearly in the last weeks of a 3 year extended warranty…..wow, that nearly won me over on such plans…..until two months later that new replacment laptop was stolen. Waa!!! Not covered!!! So much for me getting over on the world.

Self-insuring with a good emergency fund is the way to go! Thanks for the great post!

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joeplemon November 16, 2010 at 12:07 pm

Chris,
I’m glad you enjoyed the post and the humor. If a person can’t laugh about a cell phone in a toilet, he/she needs to lighten up. The photo, by the way, is not MY cell phone, but my son’s cell phone. Toilet bowl dropping is not an uncommon event!

Bummer about the stolen laptop! By the way, did you cancel your Iphone plan?

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Everyday Tips November 17, 2010 at 4:53 pm

Had I kept it, I would have been tempted to whip it into the toilet at around 19 months… 🙂 (just kidding).

I have recently paid for an extended warranty on my laptop because I had 2 die over the course of one year. One laptop would cost 400 dollars to fix it, but had I bought the protection plan, it would have been free. Considering I drag my laptop around with me, I feel the warranty is worth it since my kid’s shoes seem to last longer than laptops around here.

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