As time wears on, the cell phone insurance quickly becomes a losing proposition; I’d save a minimum of $92 by simply avoiding it altogether, assuming I required fewer than two replacement phones over the entire two-year period. – Len Penzo, personal finance blogger

Editor's note: This article by Len Penzo originally appeared on his blog, Len Penzo dot com. It has been reprinted here with permission.

Last month our previous cell phone contract finally expired. That made the Honeybee happy because it meant we could finally move to a new carrier with better coverage.

However, nobody was more excited than the kid with the fastest thumbs in the West, my son, Matthew, who no longer had to endure the supposed indignity of being stuck with an “uncool” Nokia Gravity phone because our new plan included three iPhones. True, they were older fourth-generation phones, but as far as my son was concerned, at least they weren’t made by Nokia.

Hey, don’t look at me; I’ve got nothing against Nokia. To me, a phone is a phone is a phone. Besides, I use a Blackberry that’s issued to me by my employer. But I digress.

Anyway, when signing up for the new contract, we were reminded by the sales associate that we had the option to insure the new iPhones. For $8 per phone per month, we’d get a replacement iPhone if ours were ever stolen, lost, run over by a car, or even accidentally submerged in a pool.

Sounds like a good deal, right?

Well, not necessarily. After looking into the dirty details, and then doing a little research and pulling out my trusty spreadsheet, I came to the conclusion that cell phone insurance can sometimes be a very iffy proposition.

To help illustrate, here is a breakdown of the cumulative monthly premiums I would have to pay for insuring one, two and three phones over the two-year contract period:

Looking at numbers, the point that immediately stood out was that it was going to cost me $576 in premiums to insure three phones for two years. And while our previous cell phone insurance plans had reasonable deductibles ranging from $0 to $25, the plan offered by our new carrier has a deductible of $140 per phone. That’s a lot of money, folks — especially considering that you can currently buy a brand new version of the exact same iPhones my family has on eBay for between $189 and $240, depending on whether you want the phone only, or all the accessories too.

Another interesting tidbit is that our new carrier charges $80 to repair a cracked phone screen regardless of whether or not you have insurance.

With all that in mind, let’s consider the case where I buy the cell phone insurance on the first day of my contract, and then lose the phone the very next day. (Hey, it happens.) Let’s also assume I continue insuring my replacement phone for the full two years because I’m justifiably afraid of misfortune striking again at some point during the contract period.

Here are the cumulative expenditures incurred after insuring a single phone over the entire two-year period, and the resulting realized savings (or losses) had I instead chose to bypass the insurance altogether and pay full price for a new phone on eBay:

As you can see, getting a replacement phone in the first month makes the insurance a fairly good deal; at that point I’m ahead either $92 or $41, depending on whether or not the replacement phone came with the accessories.

Even so, as time wears on, the cell phone insurance quickly becomes a losing proposition; I’d save a minimum of $92 by simply avoiding it altogether, assuming I required fewer than two replacement phones over the entire two-year period.

In fact, for me to come out ahead with the cell phone insurance, I would eventually have to either:

  • Make two or more separate claims over the two-year contract period.
  • Stop carrying the insurance as soon as six months — or no later than 12 months — after initiating the contract. (Depending on the price of the replacement phone.)

Admittedly, my kids haven’t had the best record when it comes to taking care of their cell phones; over the past few years they’ve had more than a couple of “oops” moments. But they’re older now and significantly more responsible too. At least they should be. The bottom line is that sometimes the potential benefits derived from insurance policies aren’t worth the premiums when compared to the actual risk.

In the end, I decided to throw caution to the wind and decline the cell phone insurance. Frankly, it was a no-brainer because the premiums and deductibles couldn’t compete with the relatively low cost of replacing the phones with money from my own pocket.

After all, insurance is supposed to protect you from losses youcan’t afford to replace.

Now, if the wife and kids each end up having to replace their phones more than once over the next two years, I’ll obviously lament my decision.

I’m not worried though because, as the old saying goes, sometimes being too cautious can be the biggest risk of all. This is one of those times.