Is insurance worth it if you can afford to replace the item? If not, when is it?

Question

I am talking here exclusively about insurance for items (not for health or other type of insurance where lives and liability are at risk).

Let's say I have a 1-year old Macbook (costs $2000+tax new) and the warranty is about to expire. Apple gives me the option to extend its warranty for $350+tax.

If my computer breaks by itself, I have enough money in the bank to buy a new one ($2000+tax). But at the same time, if I have AppleCare, I would have saved about $1650, but only if it breaks. If it doesn't break, I would have spent $350 for nothing.

Same thing with a car. I can buy a $10K car, and have the full coverage insurance, so that if another car hits my car and they don't have insurance, the car will be covered. But again, this may never happen, so I may be spending on something that I will never use.

How do I decide if it's worth it to get the insurance or not?

Answer 1

This entirely depends on two factors:

• What the insurance covers.
• What the likelyhood of actually utilizing the insurance to the full dollar amount.

Now let's look at what AppleCare gives you:

• Extended phone support from 90-days to 3 years (2 years for an iPhone, iPod Touch, or iPad)
• Extended hardware coverage from 1 year to 3 years (2 years for an iPhone, iPod Touch, or iPad)

What it covers is any manufacturing defect. It also covers you for phone support, as otherwise it's a $49-per-incident charge even for simple issues. It also covers any software issues that you may come across as long as the issues pertain to Apple software or the operating system itself.

What it doesn't cover is any damage caused by the user. If you snap the corner of the screen, drop it, spill liquid on it, modify it, etc... then you're responsible for paying the repair costs. If you're outside of phone support, then you're going to have to pay someone to fix any problems you come across.

Now if we're to trust this handy study done in 2009, then we can say that the 3-year failure rate for Macbooks and Macbook Pros is 17.4%.

We could go ahead and say that $350 / $2000 = 17.5% so the chances match up, but what's the likelihood that Apple is going to cover the full $2000? Only under extreme cases are you losing the full $2000 (theft, shock damage, etc...), and those are all cases that Apple won't cover anyways.

Instead we're looking at cases such as (Please keep in mind it has been several years since I worked for Apple, so these figures may be off):

• A failed hard drive (est. $150-$200 for Apple to fix)
• Failed memory (est. $200-$250 for Apple to fix)
• A failed logic board (Est. $500-800 for Apple to fix)

So this reduces our possible savings significantly. Let's then also look at what the warranty becomes after they fixed a part:

A replacement part or Apple Product, including a user-installable part that has been installed in accordance with instructions provided by Apple, assumes the remaining term of the Warranty or ninety (90) days from the date of replacement or repair, whichever provides longer coverage for you.

Which means in this case that you have a 90-day warranty after they've fixed an issue. This significantly reduces the likelihood of a same part going bad multiple times in a row.

Therefore the chances of that $350 being worthwhile are very much against you. Even if the system does fail in some way, it is likely that the repair would be cheaper than the AppleCare. The chances of running into a repair or series of repairs that pays for the AppleCare and then some are astonishingly low.

I would still get it if you were giving it to someone who was significantly lacking in any technology concepts (such as a parent or grandparent) as they are more likely to utilize the extended phone support, especially for smaller things that they might nag you about!

Answer 2

In general, if you can afford to replace something, you are able to "self-insure". You really want to understand a little of the statistics before you can make a generic call, but my rule of thumb is that insurance via "extended warranty" is rarely a good deal. Here is a simple expected value math formula you can apply (when the > is true, then you should buy it):

replacement cost x likelihood of using warranty % > cost of insurance

You can then back-compute, what is the likelihood that I'd need to lose this item to break even? Given your numbers:

$2000 x Y > $350 or Y > (350/2000) or Y > 17.5%

So if you think there is a 17.5% or greater chance that you'll need to have you system replaced (i.e. not just a simple fix) AND (as Scott pointed out) you'll be able to actually use the replacement warranty then the applecare is a good purchase. Note, this only applies to items you can replace out-of-pocket without significant burden, because if you didn't have the $10k to replace your car, it wouldn't matter if the insurance wasn't such a good deal (especially if you need the car to get to work, etc.)

So the obvious question is: "Why would a for-profit company ever offer insurance on something they are statistically likely to lose money on?" The obvious answer is "they wouldn't," but that doesn't mean you should never buy this type of insurance, because you may have statistically significant circumstances.

For instance, I purchased a $40 remote helicopter as a gift for my children. I also paid the $5 for a "no questions asked" warranty on it because, knowing my kids, I knew there was a nearly 100% chance they would break it at least once. In this case, this warranty was well worth the $5, because they did break it! Presumably they make money on these warranties because most of the purchasers of the plan are more attentive (or too lazy to make the claim) than in this case.

Edit note: I incorporated Scott's comment about likelihood of being able to utilize the warranty into a combined "likelihood of using warranty" term. This term could be broken up into

likelihood of needing replacement x likelihood of actually getting company to replace it

I didn't do this above because it makes it a little harder to understand, and may not be a major factor in all cases, but you can definitely add it after the fact (i.e. if there's only a 90% chance Applecare will pay out at all, then divide the 17.5% by 0.9 to get 19.4% likelihood of needing the replacement for it to be cost effective).

More complete formulas can be derived also (including terms for full replacement costs vs repair costs and including terms for "deductible" type costs or shipping), but I'm trying to keep things relatively simple for those who aren't statistics nerds like I am.

Answer 3

In regards to purchasing full coverage on your car even if you can afford to replace it, consider the hassle you have to deal with an accident that is not just the cost. As an example, my sister's car was stolen and wrecked. It was her problem to go recover the car on the other side of the state such that she would not be paying the storage "fees" imposed by the sheriff of the other county. Had she had insurance they would have taken care of it call.

Another story is that I rented a car and side swiped in the parking lot by a hit and run. I was responsible for the minor damage. I started down the path of paying out of pocket because it was small enough that I did not want to submit a claim. The rental car agency started to pile on extra fees such that it was worth it to turn in a claim. My insurance company was savvy enough to be able to dispute the extra charges. After I submitted it to the insurance company I basically did nothing. They took care of everything.

So, in summary, when you buy full coverage on your car, it is not just a financial decision. It is also about not having to deal with a hassle.

Answer 4

The answer to this question is very different depending on the type of item. From a purely financial perspective you would want to answer these questions which you may not have enough information to answer:

• How likely am to need this insurance compared to the average person in the insurance pool?
• How much of my insurance cost are going to the pool versus going to profits? Things like electronic warrenties are often almost entirely profits.

Realistically the question I prefer to ask are:

• If it breaks how likely am I to be satisfied with the company's handling of my claim?
• Are they going to require a recipt or proof of purchase?
• How likely is it to actually cover the aspect that broke?
• If they are just going to give me a replacement, how likely am I going to want that, versus the cash to go buy from someone else or get a completely different thing?
• How much time am I going to spend on the phone with them to make this claim?
• How much peace of mind does owning an insurance policy on this item bring me?

When something fails there is a big difference to me between having the cash and having an insurance policy that is suppose to cover it even if they are theoretically the same value. Some insurance policies may even be better than cash, like homeowners insurance might help take care of details like finding a contractor to fix the issue, finding temporary housing if your house burns down, etc.

Answer 5

Academic and generalized answer (see last section for final answer):

Insurance is for events that are both

• Unexpected

and

• Catastrophic

Unexpected and Catastrophic Examples:

Unexpected and, for many people, catastrophic events are, for example, sickness, disability, death, car accidents, house fires, and burglaries, for which you may buy health, disability, life, auto, home, and renter's insurance.

Catastrophic but Expected Examples:

It may be catastrophic for a family relying on a very old earner for that earner to die, and you can buy life insurance up to a very old age, but the premiums will reflect the likelihood of someone of that age dying within the covered period.

The more expected an event is, the more anything referred to as insurance is actually forced savings. Health insurance with no copays on regular checkups expects the insured to use them, so the cost of those checkups plus a profit for the insurance company is factored into the premiums ahead of time.

Unexpected but not Catastrophic Examples:

A wooden pencil breaking may be unexpected. Regardless of foreseeability, no one buys insurance on wooden pencils, as the loss of a pencil is not catastrophic.

What is catastrophic can be context dependent. Health-care needs are typically unforeseeable, as you don't know when you'll get sick. For a billionaire, needing health-care, while unforeseeable, the situation would not be catastrophic, and the billionaire can easily self-insure his or her health to the same extent as most caps offered by health insurance companies.

To the Question: Do I buy insurance on a Laptop?

If you're on a fixed budget buying a laptop, if it unexpectedly failed, that would be catastrophic to you, so budgeting in the cost of insurance or an extended warranty while buying your laptop would probably make sense. Especially if you need that $2000 laptop, spending an extra 17.5% would safeguard against you having to come out of pocket and depleting your savings to replace it, even though that brings you to a grand total of $2350 before taxes.

However, if you're in that tight of a situation, I would strongly recommend you to find a less expensive option that would allow you to self-insure. If you found a used laptop for much less (I can even see Apple selling refurbished Macs for less than $1000) you might decide that your budget allows you to self-insure, and you could profit from being careful with your hardware and resolving to cover any issues with it yourself.

Answer 6

Extended warranty or insurance is a tricky thing. In general, the big screen TV, or other electronics are going to become obsolete before they fail. Laptops, even Macs, are at risk for higher failure rates than other electronics. The question remaining is whether after the item has reached its 3rd or 4th birthday, if you would already be in the market for a newer model.

In the big picture, if you have the money to buy a new replacement, or pay for a repair, you are better off to avoid the insurance. The highest failures are in the first year (aka 'infant mortality') and after N years, closer to 7-10, enough for obsolescence, than in years 2-5.

Answer 7

As a rule, purchasing fairly priced (minus a spread) insurance on items you can afford to replace is a bad idea.

However, in addition to the points mentioned in the previous answers, one should note that many types of insurance are UNDERpriced because on average people do not make claims even though they are entitled to them. If you purchase something moderately priced at Best Buy and get the extended warranty and it breaks down a year later, you will be unlikely to even remember that you purchased the insurance much less go through the trouble of making a claim. More likely you will just go buy a replacement or whatever the latest and greatest iteration is. It's like homeowner's insurance--an amazing number of things is covered but no one ever makes claims, so it is cheap. If you are a person who remembers and utilizes warranties and insurance, there are many types of insurance that will save you money in expectation.

The other thing is that you know more about your own riskiness than the insurer does. I had a girlfriend who bought super comprehensive insurance on her crappy old car. I was quite stern with her about it but could not change her mind. She totaled it a few months later. They bought her a replacement. She got in a more serious accident with that car and got yet another one in addition to payment of her medical care, which did not even go to her health care insurance. Yes, her rates went up, but not fast enough to deal with how risky she was. Another example: I used to carry an e-book reader around in my shirt pocket and read it any time I had a chance. Cheap item and not that delicate, but since I had it with me all the time and used it constantly, it was a big risk for the store. The extended warranty would have been a great idea.

In short, avoid extended warranties and insurance on things you can afford to lose unless you know that you are high risk or are otherwise more likely than average to make a claim.

Answer 8

As many other posters have pointed out, unless you know (and your insurer doesn't) that because of any reason you are more likely than the average to damage your computer, insuring it doesn't really make a lot of sense if you can comfortably replace it should the worst happen.

In this particular case of a laptop, insurance is especially unattractive because computers depreciate fairly quickly. If you break it...

• ...and you're insured, you will get the very same laptop you bought more than a year ago.

• ...and you're not insured, you can choose to either find the same laptop at a substantially lower price (Apple does not really lower prices that much but you can probably get a refurbished unit, just like you could get with AppleCare) or spend the original amount in a newer and more powerful laptop.

Answer 9

Generically, like farnsy noted in the other answer, you will only come ahead in dollar terms when you are significantly riskier than the average insuree. Otherwise the insurance company would have higher rates to make a profit.

In the case of Apple Care there can arguably be other factors involved. If you did not insure your $2000 laptop and it broke (unfixably) just after the warranty period, would you replace it with a new Apple product? Maybe not, so Apple could lose a customer.

That means they have an incentive to keep you happy. If your product breaks but insurance replaces it, you are a happier customer and more likely to buy other Apple products. This is not an incentive for traditional insurance companies that only do business in insurance.

Now, with the profit margins Apple likes in general, I don't know if they've underpriced their insurance. I sort of doubt it even. But their margins on it are probably not high, meaning it's a closer call even if you are only averagely risky.

Answer 10

The key point to answer the question is to consider risk aversion. Assume I suggest a game to you: Throw a coin and if you win, you get $5, if you lose nothing happens. Will you play the game? Of course, you will - you have nothing to lose! What if I suggest this: If you win, you get $10,000,005 and if you lose you must pay $10,000,000 (I also accept cars, houses, spouses, and kidneys as payment). While the expected value of the second game is the same as for the first, if you lose the second game you are more or less doomed to spend the rest of your life in poverty or not even have a rest of your life. Therefore, you will not wish to play the second game. Well, maybe you do - but probably only if you are very, very rich and can easily afford a loss (even if you had $11,000,000 you won't be as happy with a possible raise to $21,000,005 as you'd be unhappy with dropping to a mere $1,000,000, so you'd still not like to play). Some model this by taking logarithms: If your capital grows from $500 to $1000 or from $1000 to $2000, in both cases it doubles, hence is considered the same "personal gain", effectively. And, voíla, the logartithm of your capital grows by the same amount in both cases. This refelcts that a rich man will not be as happy about finding a $10 note as a poor man will be about finding a nickel.

The effect of an insurance is that you replace an uncertain event of great damage with a certain event of little damage. Of course, the insurance company plays the same game, with roles swapped - so why do they play? One point is that they play the game very often, which tends to nivel the risks - unless you do something stupid and insure all inhabitants of San Francisco (and nobody else) against eqarthquakes. But also they have enough capital that they can afford to lose the game. In a fair situation, i.e. when the insurance costs just as much as damage cost multiplied with probability of damage, a rational you would eagerly buy the insurance because of risk aversion. Therefore, the insurance will in effect be able to charge more than the statistically fair price and many will still (gnawingly) buy it, and that's how they make a living. The decision how much more one is willing to accept as insurance cost is also a matter of whether you can afford a loss of the insured item easily, with regrets, barely, or not all.

Answer 11

Another factor to consider is that resale value of the laptop is quite bit more if it is still under warranty. This would apply to people who replace their laptop often.

It is higher because the purchaser can be assured they are not getting a lemon. I determined this by comparing prices on ebay before selling my computer.

Of course, if you keep your laptop longer than the warranty, this means nothing. But for me it meant I could sell my old laptop quickly and for a better price.

Because I used my laptop for work and totally depended on it, even one day of downtime would cost me a lot, so it was worthwhile to keep a relatively new laptop under warranty.

Also, for those using Apple Care, there is an undocumented perk: Apple covered an out of warranty repair on a time capsule under my apple care for my laptop even tho they were not purchased at the same time.

Answer 12

Can you afford to replace it? What does that mean?

• Take someone with $200K in the bank. He can afford to lose $2K without a problem.
• Take someone with $1000 in his bank account with a $2K credit option. He can pay a new laptop, but can he afford it? Insurance will be a good option.

Even if insuring means overpaying, it does spread the risk.

NB: This example is not about the Applecare program, which I think is a waste of money for many people. Others have explained very well if it would work for you or not.

I have a Macbook but no Applecare. I have an expensive smartphone with insurance for dropping and water damage, but not theft. After one year I cancel this insurance. I don't have $200K in my bank account.