79

Small insurances like phone insurance, tire insurance, etc. Are these worth it?

In general I always have a bad gut feeling about any insurance. I just don't like the idea of paying for stuff I never really use (especially medical insurance) But practically my phone COULD get lost, or a tire could hit a pothole, in which case insurance would've helped.

So in general, are small insurances worth it?

  • 6
  • 1
    Comments are not for extended discussion; this conversation has been moved to chat. – Ganesh Sittampalam Mar 5 at 20:12
  • 2
  • 3
    I think it's a mistake to clump in healthcare with other silly insurances. The fact is, if you are sick or hurt, you will get healthcare in a hospital, because we are a compassionate species. The bill can be $100,000+++. Unlike fixing a cell phone, this can be compulsory - you can't decline medical care if you are incapacitated, and realistically wouldn't if you are in pain or dying. Now what happens? – Harper Mar 8 at 15:51
  • 1
    Something important which is not mentioned in the answers and doesn't warrant a separate answer, is that you need to consider carefully the "claim process" of any insurance. Many small insurances require you to jump through hoops to claim a loss; e.g. having to bring or ship the item somewhere, and having to keep and FIND the original sales receipt. Some will only pay to replace your previously new item with a refurbished one. Some require you to be without the replacement item while they process the claim; i.e. they will not reimburse you if you go out and purchase a replacement right away. – Alex R Mar 9 at 20:37

15 Answers 15

174

In terms of pure expectation of return, taking out insurance is always a losing proposition - by which I mean on average people who take insurance lose money on it. Simplistically the amount you get back times the percentage chance of you needing it is always less than the premium, and you know this is true because insurance companies (who are very, very good at statistics) design it to be that way. After all, they do want to make a profit.

So why do people take insurance? It's about risk. You insure your house because, even though the chance of it being destroyed is very small, if it does happen (and you are not insured) it will impact your life in a major way. You might never recover financially from a loss like that. On the other hand the downside of taking insurance is just a few hundred bucks a month, which you can almost certainly afford (at least if you are rich enough to own a house). The same is true of most people's cars, and certainly of the liability insurance for a car, which can bankrupt you faster than losing a house. For medical insurance (if you are not in a country with universal healthcare) this is even more true - in the US most bankruptcies are because of medical bills.

If you decide to insure a small item, then you are on average going to lose money on it. And if you can easily afford to replace it, then you are not reducing your risk in any significant way, so there would appear to be no point. Most people who do this either do it because the statistics are not obvious to them, or because they psychologically feel better about not 'losing money' if something bad happens, even if it is a bad thing they can easily afford, and they are psychologically OK with spending small amounts of money on something that will probably do them no good.

It's probably also worth mentioning that companies love insurance for small items because not only to they make a profit each time it is taken out, but lots of people either forget they insured something when it breaks, or they can't be bothered to make the claim, or they can't find the paperwork. The company profits in every case.

Also be aware that all 'extended warranties' that cost you money are essentially insurance, just marketed in a different way.

TLDR: Insurance will lose you money on average, and the only benefit to insuring things you can afford to replace is to make you feel better.

  • 68
    "In pure game theory terms, taking out insurance is always a losing proposition - by which I mean on average people who take insurance lose money on it." That is a common misconception of game theory, that strategies can be ranked by their average monetary payout. What matters in game theory is utility, not money. – Acccumulation Mar 4 at 16:17
  • 18
    @Acccumulation I don't disagree with you but I didn't want to turn this into a lecture on game theory. – DJClayworth Mar 4 at 16:35
  • 2
    Comments are not for extended discussion; this conversation has been moved to chat. – Ganesh Sittampalam Mar 5 at 20:13
  • Although the argument is correct, I don't like the way this is framed. "Insurance will lose you money on average, and the only benefit to insuring things you can afford to replace is to make you feel better" sounds like there is not much of a point in insurance. It's worth pointing out that it makes sense to insure against potentially ruinous risks although the expected monetary gain is lower than the premium. This is where @Acccumulation's point matters: The expected monetary gain may be lower than the premium; but the expected utility may still be higher for ruinous (but not small) risks. – henning Mar 11 at 13:03
  • @henning The key point in the sentence is "things you can afford to replace". I spent the first part of the answer explaining exactly the thing you said i should explain. – DJClayworth Mar 11 at 13:14
64

An insurance is a gamble with the insurance company where you bet that something bad will happen to you and they bet that everything will be fine. The insurance company decides the odds for that bet, and they do that based on detailed analysis of a huge amount of statistical data. So you are betting against the house. If an insurance would be worth it from a cost/risk assessment in the long run, then no insurance company would offer it.

There are only three cases where an insurance makes sense economically*:

  • There are some circumstances the insurance company doesn't know which make your risk a lot higher than for most people (and not disclosing that fact isn't insurance fraud in this case).
  • The potential damage is so high that it wouldn't just be inconvenient to pay for it, it would completely ruin you. Any emergency you can pay out of your emergency fund isn't worth insuring against.
  • It's an insurance which is directly or indirectly subsidized by a 3rd party (government, employer...) making it a winning bet for both you and the insurance company.

So unless having to replace your phone out of your own pocket would be something you wouldn't be able to do or your personal lifestyle makes phone mishaps magnitudes more likely than for other people, it is likely not worth it.

Health insurance, on the other hand, is an insurance almost everyone should have if possible.

  • There are many medical problems which can happen to everyone and which generate costs which greatly exceed the emergency funds of most people.
  • When you need medical help, you are already in a situation where you feel extremely bad. You don't want to have an additional stress factor in form of worrying about how to pay for all the stuff the doctors do to you in order to help you.
  • Being able to go to the doctor whenever you feel you should without having to consider whether or not it's worth it can fix many medical problems before they become expensive (and painful).

*unfortunately there are some cases where legal requirement or contractual obligations force you to get an insurance even if you don't think it makes sense economically.

  • 13
    Also, in the US, health insurances are typically paid for with pre-tax money, effectively being subsidized by the government. There is also the non-trivial issue of negotiating medical procedure costs without the insurance. – Boris Bukh Mar 4 at 16:39
  • 6
    It might also be worth mentioning a case where insurance makes no sense, and that is where you don't really need the things you are insuring. The replacement cost of my books and music would be horrifyingly large, but if I lost them in a fire, there is no way I would attempt to rebuild the collection; the vast majority would be hardly missed. Similar arguments apply to jewellery you have inherited but don't really like. – Michael Kay Mar 5 at 8:16
  • Comments are not for extended discussion; this conversation has been moved to chat. – Ganesh Sittampalam Mar 5 at 20:10
  • Love the increased-risk angle, so often overlooked. Even if you assume that an insurance company puts a 66% premium (mgmt fees etc.) on your input, then you 'just' need to be over three times as risky as a normal person to make it worth it. -- If your dentist knows your hobbies, might as wel stick to dental insurance ;-) – Dennis Jaheruddin Mar 5 at 21:52
  • 15
    Since there is a footnote snarking about legal requirements to get insurance under some situations, let me point out that the most common case of this, liability insurance for automobile driving, is intended to protect other people from you. The risk of your crashing your car in a way that seriously injures someone other than yourself is low, but if it does happen, that other person's life could be ruined, and it's your fault. So, to drive, you are required to take steps to insure (no pun intended) you can pay damages (in the legal sense) if you have to. – zwol Mar 6 at 15:40
20

According to utility theory, one should adopt the strategy that maximizes one's expected utility. So when it comes to insurance, one needs to look at the probability of each scenario, and the utility of that scenario. For small amounts, utility and money can be treated as being close to proportional: losing $2 is about twice as bad as losing $1. But for larger amounts, it gets more complicated, and generally losing a large amount is larger loss of utility per dollar than a small loss. This is where insurance comes in: if you have a 1% chance of losing $100,000, then paying $1,100 to avoid that possibility may increase your expected utility, even though it decreases your expected money, if the loss of utility from losing $100,000 is more than 100 times the loss in utility in losing $1,100.

One method of modeling utility is to assume that it's proportional to the log of one's money. If we use the natural base, then going from $200,000 to $100,000 is a loss of 0.69 utils. If that has a 1% chance of happening, then the expected utility loss is 0.0069 Going from $200,000 to $198,900 is a loss of 0.0055 utils. So in this case, insurance increases your expected utility, since 0.0069 > 0.0055.

Now let's go through the above numbers, except with a loss of $100 instead of $100,000. Going from $200,000 to $199,900 is a loss of 0.0005 utils, so the expected loss is 0.0000050. If you have to pay $1.10 for insurance, that's a loss of 0.0000055 utils. So in this case, the insurance decreases your expected utility.

So whether insurance makes sense depends on how large a loss it is, how likely it is, how expensive the insurance is, and also personal factors such as how much money you currently have (if you have a billion dollars, the possibility of losing $100,000 isn't that big of a deal) and what your utility function/tolerance of risk is.

  • 2
    @GiuPiete "it's not the case that $:utility growth is linear" I specifically said it isn't. It's really not clear what point you're trying to make with your comment. – Acccumulation Mar 5 at 16:00
  • 1
    I would disagree with your calculations based on one small detail. The utility of your first dollar is far greater than the utility of your hundredth dollar above expenses, and the utility of a dollar below your expenses is near 0 due to a thing called bankruptcy. In fact, monetary utility is best described as the difference between 'enough', 'not enough', and 'disposable' with the bulk of the utility gains being somewhere between 'not enough' and 'disposable'. – GOATNine Mar 5 at 16:43
19

TLDR; If the item isn't expensive enough to be willing to put in so many hours of your time and effort, then just always skip it. If the item wouldn't cause a major financial hardship for you to replace, skip it.

The big problem with small insurances is they are in most places poorly regulated, and even when operating legally are doing so in a way that is "technically legal" but actively deceptive using small print and ridiculously time-consuming claim processes. This is a polite way of saying they are, 95%+ of the time, a total rip-off.

One example is a major retailer here in the US sold (and maybe still sells) insurance on air beds. A friend of mine bought it, thinking it was only a few dollars and air beds go bad all the time, so maybe this would be a good bet?

Naturally the air bed started leaking, and my friend asked for my help because the process didn't seem to make any sense, so I called up the company. The operator read out the exact requirements on the insurance and had trouble not laughing while doing so, because it was one of the most rediculous things I ever heard. To be covered the bed would need to be losing air through no visible rip or tear, not through a seam, and not through the inlet valve assembly.

...so how, pray tell, could any item actually be covered? One that loses air through some form of internal teleportation? They gave a small nervous laugh and said that basically, yes, that does seem like how it would need to happen.

Similarly I worked for a company that sold electronic insurance, and I got to talk to customers that did and did not get the insurance on the items to work for them. I always asked how the process went, and not a single one said that they needed to make less than 4 phone calls, usually waiting for half an hour or more each time, they kept their original receipt and sometimes even cut out the UPC code from the box, usually sent a few emails back and forth as well, and it took around 2-3 weeks to get a gift card back. And that was when the company agreed to cover the item in full.

The trick is, most people don't have that kind of free time or sheer force of will to collect on what amounts to usually under $100 of 'insurance'. I know of one single major US electronics retailer that offers a 'protection plan' that is actually worth the money and not a hassle, out of the dozens of companies with similar claims.

Another common trick is to sell insurance on an item, but it turns out the fine print says it only kicks in after the manufacturer period expires (usually 1-3 years), even if the insurance you bought was supposed to protect from things the manufacturer wouldn't cover regardless.

There are an infinite variety of clever ways these companies have developed to take advantage of people, engaging in rent-seeking behavior to increase their profits while providing no useful service to most or all of the people who buy their goods.

Add this reality together with the uncertain risk that you would need it at all, and you'll find that the vast majority of the time these things end up as losing propositions.

If the item you are looking at is considerably expensive enough to be a real burden if it has a problem - like a car, house, etc. - then you'll need to try to do some research to see if that particular option you have seems to operate in a legitimate way. Then you'll need to read the fine print, keep up with all required paperwork and documentation kept in a safe place, and if it comes to time that you need it be prepared and diligent because you will usually spend many hours on the phone and by email/website/letter to get what is owed you.

  • 3
    Not all "small" insurance policies are a hassle to collect on. For example I have insurance on my cellphone, in the UK, even though it's a relatively cheap phone (less than £100) and the cost of replacing it would be immaterial to me. But a few months ago I dropped the phone and shattered the glass. Result: 24 hours later, I had a new replacement phone, and the tech in the phone sales shop did the job of copying all my data from the old damaged phone to the new one as part of the deal. That saved me figuring out how to do it myself and spending a my own time actually doing it. Time is money! – alephzero Mar 4 at 18:46
  • 1
    … perhaps the moral of my insurance anecdote is: take out a policy where you can claim on it by talking to a real human, not somebody in a call center located in another continent. In my case there was no paperwork involved at all: the broken phone's number was enough to identify that it was insured, and a couple of questions confirmed that I was its owner. – alephzero Mar 4 at 18:54
  • @alephzero totally agree with your (implied) point that if the insurance is other than for financial recompense, then other things than financial cost must be considered as potential value. Your phone insurance in such cases not only pays for return of service, but across a social group maintains those services(keeps the repair services operating.) – Giu Piete Mar 5 at 8:15
  • 1
    @alephzero: Re "Time is money!", I'm presuming you didn't have to drive an hour or so each way to get to the cell phone store :-) – jamesqf Mar 5 at 18:58
12

As a rough rule:

"Don't buy an insurance for what you can afford to get again; buy one for what you can't afford to lose."

Indeed, it's not only a question about the average cost (because statistically (and by design from insurance companies), it's never a good operation — as detailed in previous answers), but also if you can handle the event the accident happening. Because the long term doesn't matter if you're "game over" in the middle of the journey.

Note that it's not only about the cost of the tire itself, but, would you need the car to go to work, the cost of renting another car to go to work/don't work until the tire is fixed, etc.

So to answer your question, you should consider the full cost of a faulty tire (and this depends on your context), and then check if you can (or are ready to) support the consequences of this risk.

What you should also take into account, is the fact that your tire insurance can't be activated every time your tire is faulty (so you shouldn't over-estimate how likely you are to benefit from the insurance).
Plus the fact that you will not be reimbursed for all the costs of the incident: excess/deductible, sometimes the cost of having to pay upfront prior being reimbursed, the cost of your time filing up all paperwork, etc.


See also "Only Buy Insurance When You Can’t Afford the Loss".

  • Regarding tires, I used to be able to get a used tire, already on a suitable rim, for $10 from the junkyard. These days junkyards have better sales/distribution networks and that's no longer possible, but if you're aiming to work out cost vs benefit of insurance based on "what you can't go without" and "full cost", you need to be careful not to over-estimate cost based on an identical replacement rather than something cheap you can get by with. Tires were a good example but same applies lots of other places (e.g. getting a refurb iPhone 5 or 6 to replace your broken X). – R.. Mar 5 at 18:42
9

All insurance is a waste of money until you need it.

I don't spend money to insure the small stuff. Most of the time there's no problem and when there is, the replacement cost is reasonably inconsequential when you compare the insurance cost saved versus the cost of replacing the item.

Where the dividing line is between inconsequential and a painful expenditure to replace the item is a personal decision ($$$).

7

The example of a phone is great. We have 3 phones in our family. Say $800 each. And the $10/mo per phone insurance. $30/mo just for the insurance. 90% of claims are for cracked screens. If I set aside the $30, we could crack a screen every 3 months and avoid talking to the insurance department of our provider. I told my wife and daughter if they manage to do more than a screen crack, I’ll give them back a prior model, and 10 mo penalty box. Then we get another new phone.

Given the nature of the question, I’d suggest finding a decent credit card with accident protection included as a perk. It will extend the seller coverage by up to a year. For many electronics, the full 2 years takes you the time when the value is 1/2 original cost anyway.

5

The simple way to evaluate insurance against an event is to look at 1) the potential loss if an event occurs, and 2) the probability of an event occurring.

With medical insurance, the odds are generally irrelevant because the potential loss is enormous. Very few people can afford to cover catastrophic medical expenses out-of-pocket.

With consumer insurance (phones, tires) it's a little less clear. If you broke your phone, could you afford to replace it (or if you couldn't, would you be willing to go without?). What are the odds that your phone will get broken? Once you have those numbers, you can determine if insurance is statistically worth it.

If your phone costs $500 and insurance costs $10/month, that means that in any given year they think the odds of you needing to replace your phone is about 24% ($120/$500). It's actually a little less since they bake in some profit to their rates. If you think the odds of you needing a new phone are higher, or you would absolutely need to replace your phone and can't afford $500, then buying insurance might make sense.

However, an alternative would be to just save the amount that you would put toward insurance in case one of these events occurs. That's called self-insurance. You can actually get away with saving less that the combined insurances you're offered, since the odds of multiple events happening are much lower. So if you save $50/month, and in one year have $600, then you can afford to either replace your phone or tires, but maybe not both. But the odds of both happening are much smaller. Plus if neither event happens, you don't need to save any more.

  • But most medical insurance (at least what's required under Obamacare) doesn't just cover catastrophic expenses: it covers many things I could easily pay for out of pocket, if they were needed. – jamesqf Mar 4 at 17:40
  • 3
    @jamesqf true, but one could opt for a high-deductible plan that would only kick in after a higher deductible is met. In my experience, the lower premiums more than make up for the difference in coverage. – D Stanley Mar 4 at 17:42
  • 4
    @jamesqf: For the most part, that's only true for preventive care (due to sky-high deductibles, "coverage" of other small things only applies when you've already had huge medical expenses), and the whole point of giving you preventive care with no out-of-pocket expenses is that it reduces the probability of catastrophic expenses the insurer would be responsible for by taking measures not to get sick (e.g. vaccines) and by catching small things before they become big. – R.. Mar 5 at 18:37
5

One aspect of some "small insurances" that I haven't yet seen mentioned is that certain kinds of insurance may provide one with advantages beyond the monetary value of the payout, although some of these may not be worth as much as they once were. For example, if someone who gets an unrepairable flat in an unfamiliar area is a member of a roadside-assistance plan, they would be able to call the phone number for the plan and immediately have a reliable service crew dispatched to them. In the days before people routinely had pocket web browsers, someone who was signed up with a plan could have help dispatched to them while someone who wasn't on the plan would still be trying to figure out who to call.

Finding towing service in a remote area is probably easier now in the days of pocket web browsers than it had been previously, but for people who are often victims of "choice paralysis" the peace of mind from knowing that they can just call one number and not have to worry about choosing a towing operator may be worth the cost of the insurance, whether or not towing fees would cause any particular hardship.

3

The very short answer is: No, small insurances are not worth it. The reason is called the calibration theorem.

If you accept a sure loss to remove a small risk (which is exactly what a cell phone insurance is), then under standard assumptions on rational behavior over gambles (von Neumann Morgenstern expected utility maximization), you will be committed to also reject huge potential profits for a medium risk. Think about drawing a curve that represents how much you value every dollar, every cent in terms of utility. This is what expected utility maximization tells you to do. If you make the function concave, you will be risk averse and in some cases want to buy insurance. The issue is that locally, this function will still be almost flat. But if the curve is approximately flat, you are approximately risk neutral and will therefore reject insurances over small risks.

3

As others have mentioned, insurance is geared toward risk aversion, and is best calculated in utility units.

Most rational adults choose to take insurance (consciously or otherwise) on a combination of relative utility of money versus relative risk aversion. Risk is 2 part in that it takes into account both the anticipation of a negative event (hereafter probability) versus the magnitude of that same event. Dropping my smartphone and totaling my car seem to be roughly similar in probability, but the magnitude of the events are vastly different (1k USD versus 6k USD replacement for the car, with a loss in utility for having a crappier car).

The biggest utility drop, however, happens when a negative event pushes your finances into insolvency, so it's a non-linear curve, with a 'kink' in it. The utility of the top 25% of my income is less than half of the utility of the second 25%, because losing more than 25% of my income would eat into savings as opposed to disposable income. The third 25% can be considered to hold all the remaining utility value, as even keeping the bottom 25% would not allow me to meet all my financial obligations for any serious period of time (therefore pushing me into bankruptcy or at least serious debt).

Therefore, assuming the insurance is the same percentage cost of the object be insured, and the negative event probability is identical, the value of insurance increases with the value of the item at a greater than 1:1 rate. replacing a $1000 phone is less harmful than replacing a $30000 car, and since I can afford the first and not the second, I may be inclined to forgo phone insurance and elect auto insurance, even if the auto insurance is a worse deal.

Additionally, 90+% of extended warranty/insurance plans cost more than they are likely to pay out. You are purchasing peace of mind and security against risk at a higher cost than replacement cost specifically because it allows you to pay that replacement cost incrementally. Spending $1000 10 months in the future is better than Spending $110 a month for 10 months, unless you need that $1000 before the 10 months are through.

2

The general answer to any "is it worth it" insurance question is "no," because the insurance company is making a profit on the insurance. However, that does not mean that insurance is always a bad idea or that insurance companies are cheating their customers.

When you buy any product from a business, that business is making a profit. And there is nothing wrong with that at all. They are providing a service and should be compensated for their efforts.

Insurance companies also provide a service, but unlike other types of businesses, their product is monetary. You pay them money now, and they might pay you money later. If they pay you more money then you spent, you came out ahead, and if you spend more money then they give you, it was a loss for you.

In order for the insurance company to make a profit, they need to bring in more money than they pay out. In fact, they need to bring in a lot more money then they pay out, because in addition to their profit, they have all the overhead of running a business.

As a result, on average, you will come out behind when you purchase insurance. This means that when you are on the fence about whether or not to purchase any insurance product, the default choice should be "no." On average, you are financially better off without insurance.

Now, that doesn't mean you should never buy insurance. Insurance companies spread risk across all of their customers. If I am in a situation where I have a risk of financial ruin in a certain circumstance, I can eliminate that risk by purchasing insurance. For example, I have term life insurance, because if I were to pass away, it would be financially catastrophic for my family. (I'm hoping that the insurance company makes 100% profit on that deal!) I also continue to buy expensive health insurance because an unexpected medical event would be financially devastating. However, I always decline the extended warranty when I buy a $300 appliance, because I don't have any trouble coming up with another $300 in the unlikely event that it breaks, and I would rather keep the money than contribute to the profits of an insurance company unnecessarily.

To decide if you want the insurance, you need to figure out how much you can afford to pay if something happens, how much they cover, and how badly you want to transfer your risk to them.

For small things like phone insurance, tire insurance, or other extended warranties, you need to decide how much trouble you would be in if you needed to replace the item you are insuring. If it would be terribly difficult for you financially to replace a phone that gets damaged, you could get the phone insurance. However, you need to keep in mind that it will most likely be costing you money, not saving you money. A better plan is to build up an emergency fund that can cover things like this, so that if you do happen to take your phone swimming you can afford to replace it.

Note: This answer is adapted from my answer on another question.

  • The first sentence only seems to make any sense if you're using "worth it" with a highly technical meaning. The plain meaning of "Is it worth it?" is "Do the benefits exceed the costs?" and your own examples demonstrate that the benefits of buying insurance include peace of mind, and not just the expected payout. – Peter Taylor Mar 6 at 17:15
  • @PeterTaylor One of the key words in my first sentence is "general." By that, I mean that in many, perhaps even most, cases, absent any other considerations, the benefits of insurance do not exceed the costs. But I do go on to explain that there are reasons to purchase insurance even if the mathematical expected outcome is negative. Indeed, as you mention, my entire answer explains why you might buy some insurance, even though, in a mathematical sense, insurance is not worth the cost. – Ben Miller Mar 6 at 17:19
  • Small quibble with an otherwise great answer: insurance companies don't need a "lot" more premiums than claims. One of the lesser known elements of insurance is this: insurance companies invest the premiums. After all, it might be years between when you start paying premiums and when you file a claim - they can take advantage of compound interest of that difference in time. It's not uncommon for an insurance company to pay more in claims than they take in with premiums yet still stay in the black - simply because of their reserve pool earning interest that covers the difference. – Kevin Mar 8 at 19:02
2

Insurance is a financial tool/product. You are buying a transfer of financial liability.

Generally speaking no matter what's being insured, if you have the financial means to self-insure, that's what you should do. If you're a billionaire, you don't need most insurance.

There are situations where the low level consumer type specific product lines of coverage are priced below their value particularly because there is no underwriting. Are you clumsy and work in a tough environment where you routinely drop your overly delicate cell phone breaking the screen? Yes? Then maybe the $84 per year insurance is worth it for you.

Is insurance always a bad deal? No. Does it matter that the sales person makes 50% of the cost in commission? No. It matters that you break your screen every 6 months, screens cost $150, there's no underwriting and the insurance costs $7 a month.

I'd rather put the $7 monthly insurance premium in to my own savings account and deal with the broken screen if it happens. As an aside, this is kind of the point of your emergency fund. You self insure some of these risks.

-1

No. Never

Other answers already cover the financial angle: You will lose money, on average - that's how insurance companies make money.

But there's something even more important: Insurance covering a $400 loss is worth less to you than $400.

If your $400 device breaks and is covered by insurance:

  • First you have to find and read the paperwork.
    • Let's hope you're not on a business trip.
  • You need to document and file the claim.
    • Making photos of a broken phone can be tricky if your camera is that broken phone.
  • You need to wait until the claim is processed.
    • You may need to correct any mistakes they made, which may have lead to them mistakenly rejecting the valid claim.
  • You then have to wait for the payout to arrive.
    • Or do you need to pick it up? Let's hope you didn't move to a different state/country.
  • You'll need to accept the compensation, which might just be a refurbished outdated device you didn't actually want.

If your $400 device breaks without insurance:

  • Buy a new one. Or a used one. Or don't replace it. It's up to you.

Insurance is for things you can't easily afford to replace/pay on your own.

-7

Insurance is a complete waste of money. You would be better off making a bet at a roulette wheel. For example, a straight up bet on a roulette table is has 35:37 odds, which means the net present value of $100 of that bet is about $94. In other words you lose about $6 out of every $100 bet straight up. By comparison, most insurance policies have payoff odds of about 1:16, which means for every $100 you spend on insurance your net present value is about $6 dollars and you lose $94. If that sounds crazy bad, it's because it is. It is pure stupidity to buy insurance. You would be better off burning your money, because at least you would have the fun of watching the fire.

UPDATE ----- The math of insurance

Following up from a comment below... I will walk through some basic math of insurance. This is futile for most people, because most people have no capability or interest in using logic when it comes to insurance. They make decisions based on fear and emotion, so math is not really going to have an effect on them. For the 1% who actually have a desire to use logic in how they spend their money, read on:

Where I used to live in Massachusetts $100,000 (the bank-required minimum) of fire insurance costs about $800 per year. (The insurance company discounts it to $650 the first year to trick you into buying it, then raises rates starting in year 2). The chance of a house burning down is about 1 in 2000 (actual statistic). Therefore, the average value of such a policy per year is $50 ($100,000 / 2000). Since, the cost of the policy is $800 per year, it is obvious the scale of waste.

Also, the replacement cost of the typical house in the area is $400,000 so people with $100,000 policies are just fooling themselves. If they actually took insurance seriously (LOL), then they would need $400,000 to replace the house plus $50,000 for living expenses while the house is being rebuilt. To buy $450,000 in fire insurance in my area would cost about $3,000 per year. People will not usually pay $3,000 per year for fire insurance on the typical white collar take home pay of $75,000. So, they just mentally pretend that they are "covered" by their $100,000 policy, which they are not. Of course, for those whose house actually burns down, they swiftly find that the legal fees and other costs eat up that $100,000 pretty fast. The reality is that there are far better uses for $800 per year than spending it on insurance. People who buy insurance voluntarily are essentially buying a psychological product, not a financial product. They have fear and the insurance makes the fear go away, but from a financial standpoint it just decreases their net worth.

  • 4
    Please add "insurance for things you can afford to lose". Because for expensive things, your answer is just as invalid as some roulette strategies (like the Martingale) which would work only if you had unlimited funds. Similarly, if you don't have enough emergency funds to buy a new house, then having your uninsured house being destroyed might make you homeless. Or if you have a car or a machine your income depends on, you might become bankrupt if you lose it and don't have the funds to immediately buy a new one. – vsz Mar 5 at 7:08
  • 2
    I truly don't understand this answer. Take home/fire insurance as an example, if you are one of the unfortunates whose house burn down, how do you recover without insurance? You still owe the bank and all the premiums would never have covered the home and possessions lost. I get that for everyone that won the gamble, but paid into premiums, they had a 0% return on their money, but who would be happy with a return? I hit a deer once; I would have rather not hit the deer even if that meant not seeing some return on my money. – UnhandledExcepSean Mar 5 at 18:16
  • 5
    @FiveBagger And in the unlikely event that your house burns to the ground? The 16k in premiums you saved is going to do what exactly? I understand the pure numbers of it, but what is the value of not being ruined financially? – UnhandledExcepSean Mar 5 at 18:45
  • 3
    I work in the insurance industry, and I think it's hilarious how bad and misinformative this answer is. Insurance companies don't run on 94% profit margins - that's absolutely insane and ridiculous on its face (know what happens to any business that tries to run on 94% profit margins? A competitor undercuts them and sells for a small fraction of the price, and still takes home a healthy profit.) But, hey, don't listen to me. Just google "Average profit margin insurance" - and get back "3% to 8%". – Kevin Mar 5 at 21:33
  • 2
    Ah! So your argument is, "Well, Insurance Companies don't make a large profit, but almost all the money they take in goes to overhead, and almost none of it goes to actual claims"? Yeah, you don't know what you're talking about. For reference, check out: insuranceonworld.blogspot.com/2009/07/… - homeowner claims account for 87% of the premiums. Not 6%. – Kevin Mar 5 at 22:20

protected by JoeTaxpayer Mar 4 at 21:53

Thank you for your interest in this question. Because it has attracted low-quality or spam answers that had to be removed, posting an answer now requires 10 reputation on this site (the association bonus does not count).

Would you like to answer one of these unanswered questions instead?

Not the answer you're looking for? Browse other questions tagged or ask your own question.