Rational Preparedness

Should You Buy That Insurance Plan at the Store? Or For Your Phone?

What if there was a way to insure yourself against risk, without throwing your money away on these costly insurance plans?

You’ve been there.  You’ve been at the checkout, buying that new gadget or gear and the cashier says to you, “would you like the protection plan?”  What is insurance but preparedness for the loss of an investment or durable good?  You don’t want to pay the extra.  You feel like the insurance might be a bad deal.

Yet, you face risks and insurance serves the purpose of reducing those risks.  When you drop $400-$700 on a cell phone; having that phone break, before the contract is up, can be a bit of a financial disaster.  You might even be stuck without a phone, for some time, and you need your phone.  Worse, you could be paying for phone service, when you have no phone to use on it, because of the contract.  My carrier has a plan for $11 a month. Paying $11 a month gives you peace of mind that if you lose or break your phone, you can afford to get it replaced.  We face this same situation, to a greater or lesser degree, whether it’s a phone, TV, computer, sleeping bag, or anything else we buy, that can come with insurance.

Your instincts were right.  The plans are too expensive.  If you pay $22 a month to finance your phone (that buys a $528 phone over two years), paying $11 a month is the same as buying half the phone again.  Over two years, that will cost you $264.  Then it covers the cost of paying off your old phone minus about $80+ deductible.  Some plans cost less.  Some cost more.  It depends on what the plans cover and who is selling them.

That brings up another good point.  Some plans cover if the phone is lost/stolen, some don’t.  Some cover if they get wet, some don’t.  Some will deny you if the phone is “abused.”  Some will cover screen replacement, some won’t.  This means that before you can file a claim, you need to talk to a bureaucrat at the insurance company, to get your insurance.  You will be scrutinized and either approved or denied your claim.  Most of the time, if you buy a good plan, you’ll be approved but you still face the risk and the scrutinizing.  If you get good service, if could take 24 hours to get approved.  That’s 24 hours without a phone.  I can’t speak to the service with insurance plans on other consumer goods as they are all going to be different.

Examples of Insurance Plans I’ve Been Offered

Device Cost Insurance Fee Term
HP-Laptop $425.00 $260.00 3 Years
Samsung 250GB SSD $85.00 $20.00 3 Years
Panasonic Microwave $125.00 $20.00 2 Years
RCA 4K TV $500.00 $120.00 3 Years
Seagate 4TB External HD $120.00 $6.00 2 Years
40 Gallon Water Heater $400.00 $69.00 5 Years
Sleeping bag $130.00 $18.00 1 Year
Furnace, Drier, Water Heater: Coverage for up to $600 of repairs from my gas company. $600.00 $21.00 1 Month

 

The chart above shows some of the insurance plans I have been offered, over the past two years.  You can see they have different prices as a percentage of the price of the item, depending on how risky the consumer good is.  The most expensive one, for a consumer good, is the one for my Laptop, coming in at more than half the retail price of the machine.  I guess lots of people must drop them and break them.  I wonder if the plan covers water damage, probably not.

One of the cheapest plans is that for my new water heater.  The $69 is way cheaper than what they wanted for my similarly priced laptop and the plan is for 5 years.  This is because the odds of something going wrong with the water heater, in 5 years, is very low.  There are some things to note here though.  There are lots of costs, above the cost of the water heater, not covered.  I spent about $50 on plumbing supplies and tools.  I happened to have a car that could hold a water heater.  If not, it would have been $20-30 for delivery.  I was able to install the water heater myself.  That cost me one evening, after work.  Otherwise, it could have cost me more than the water heater itself.  None of these added costs are covered by the insurance.

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The appliance plan, offered by the gas company, is easy for them to sell because people fear the loss of their furnace and the thousand of dollars that can cost.  Yet, the plan only covers $600 of repairs, per year, and not the full replacement of the furnace.  Over Two years, the plan costs $504.  You almost completely pay for the maximum one year pay out, in two years.  The plan does come with the benefit of having a single number to call, if you need a repair, and competent repair people to do the job.  If you are extremely broke and suspect your appliances might be about to break, it might not be horrible to buy this, for a short time but it is a bad deal to keep buying it.  If you can scrape together $600, you are better off without it.  They are tapping into a legitimate fear and using it to sell a plan that does not successfully eliminate the reason for the fear.

 They are tapping into a legitimate fear and using it to sell a plan that does not successfully eliminate the reason for the fear.

…But Some People Make Out On These Plans

800px-flat_tireWe’ve all heard these stories of someone making out by buying one of these plans.  My parents seemed to make out buying the tire insurance plan on their van.  Because of that, I used to buy tire insurance.  Then, one day, I had to use the plan.  One of my tires went bad, early.  So, I invoked the insurance, which was quickly honored.  I don’t remember the cost at that time but the next set, came with a $30 fee for insuring the tires for 3 Years.  So, $30 to insure a set of four $100 tires.  That doesn’t sound so bad.  If you look at the chart above, it would be one of the cheapest plans.

There are a couple catches with the tire insurance though.  The odds of you needing to invoke the insurance for more than one tire at a time are extremely low.  Chances are, something will happen to one of your tires and you will get a new one then.  Combine this with the fact that my plan only covered the tires that I bought and not the replacement tires, provided under the insurance.  This means I had to buy the insurance again, when I made my claim.  On top of this, the tires were pro-rated.  So I had to come out of pocket to pay for the wear I had put on the tires.

So I paid $30 when buying the tires.  I paid $30 when getting the tire replaced, on the insurance plan, plus I paid for the wear on the tires.  By the time I was done, I damn near paid for a new tire.  What does the insurance even cover?  This was a horrible deal, even for me, the guy who had a claim.

What to Do Instead

There is a real risk associated with purchasing a whole host of consumer goods and a real need for insurance but these plans are expensive and generally a bad deal.  Usually you have to still come out of pocket when something goes bad.  There is a real need for insurance here but you throw money away buying these insurance plans.  What if there was a way to insure yourself against risk, without throwing your money away on these costly insurance plans?  There is.

Insurance works for one reason.  That reason is uncertainty in a single situation mixed with a higher degree of certainly spread out over many situations.  In other words, you don’t know if your device is going to break but the actuaries, at the insurance company, know what the odds are.  They price the insurance based on those odds, the administrative cost of running the insurance plan, and some profit for the insurance company.  They sell many people insurance and spread the risk of loss over those many people.  Most of them don’t make a claim, so most of them pay and receive nothing in return, except peace of mind.  This is a process of pooling risk.
calculator-1019743_640Large corporations sometimes will pool risk, themselves, by the mere fact that they are large.  If you are a company with a fleet of 500 cars, you can pool the risk that any one of them will crash, hire an actuary to tell you the odds, and set aside the funds to repair and replace your crashed cars.  The actuary can also give you a price to cover your liability against damage to other people’s life and property.  As an individual, you cannot make this kind of risk pool for your car but you can for your consumer goods and your appliances.  In doing so, you get to pocket the profit, and save some on the administration expenses.  For example, you can get the cost calculations, based on actuarial data, for free.

You pool your own risk and make your own insurance plan.  In doing so, you save the money you are throwing away.  There are no bureaucrats to deal with, the plan covers everything you want it to cover and the plan is payable over time. 

How Do It.

Making your own risk pool for your consumer goods and appliances and funding a self insurance plan is easy.  You already purchase several different devices and appliances, over time and these devices and appliances are what will make up your risk pool.  You’re going to set aside your own money in your own fund, to cover the risk of several devices breaking, being lost, being stolen etc.  The odds of any one of them breaking, during the coverage period, are low but the odds of one of them breaking are a bit higher.

The first step in creating your self insurance fund is going to be determining how much money you need to set aside.  This is super easy.  You don’t have to hire a 6 figure earning actuary to calculate the risk of each of your devices breaking.   The companies selling you insurance have already done that.  They give you this information for free, when they try to sell you insurance.  When the cashier offers to sell you insurance and hasn’t told you the amount yet, don’t just say no.  Ask them how much it costs and for how long is the coverage.  These are the numbers you need.

So now you know how much money to set aside for your insurance and you know how long the insurance will last for.  The next step is to set the money aside and track it.  To track how much money you’ve set aside for each item and for how long the insurance will last on that item; use a spreadsheet.  This is a simple spreadsheet to build.  You just need an item list with a column for the item, the expiration date, the premium, the amount saved and the balance owed.  I use a second sheet to track each payment into the plan and the total amount saved.  If you don’t have spreadsheet software, you can just use google sheets, or download Open Office.

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My Results

I have been doing self insurance plan for exactly two years.  I started it when I bought a Cell phone.  I was offered the Insurance for $11 a month and didn’t want to pay it.  In two years time, I insured 10 consumer goods.  Plus I insured my Furnace, Water Heater, and Drier for repairs.  I chose not to cover the water heater for up to $600 of replacement cost, when it went bad, at what was definitely the end of its useful life.  This is because I don’t think the gas company plan would have covered it for what happened to it.  Now that I have a 2nd plan on the water heater, I will cover replacement cost if it breaks within 5 years–for any reason, including what happened.  It leaked, due to age.  It should not leak within 5 years.  If it does, that’s a defect what would be covered under warranty and by the 2nd plan.

I have made two withdrawals from the plan.  In this past summer, my phone screen broke.  I withdrew $110 to get it fixed.  The repair shop had a difficult time with the phone and I believe it was not a successful repair.  The phone worked fine for 3 months, then the screen started separating from the phone and eventually the touch features of it started failing.  I decided it was time for a new one, on the phone’s two year anniversary.   The phone was purchased through a finance plan, through Sprint and was paid off at this time.  I withdrew The remaining $164 of the balance of payments, I made in my insurance plan and used it towards the purchase of a new phone.  I also withdrew an extra dollar for change making simplicity purposes.

I believe this is close to on par of what I would have gotten, had I had the insurance plan.  They would have offered me, either the same phone I had, or an similar outdated model.  I would have had to come out of pocket, for about $100 to get the phone.  This would save me about $200 on it, which is a bit more than I withdrew.  I would have had to get an older model phone than I got.  I don’t know if they would have allowed me to apply the money towards a new model phone, or not.  That’s what I chose to do with the $165.  I paid for the new phone, outright.  My bill will drop by about $20.67 a month because I’m no longer financing a phone.  I plan to save that to finance the next phone.  That’s a slightly different topic.

I ended up having $745 in the insurance account at the end of two years.

I ended up having $745 in the insurance account at the end of two years.  I still owe $50 to the plan, for my laptop and the full $69 for my water heater, which I just purchased 2.5 months ago.  I believe the water heater is not likely to go bad and it is covered in two ways already.  One under the appliance insurance plan and the other under manufacturer warranty.  I already mentioned it would be covered above.  I’ll make the $69 payment, next year.

I get flexibility in making the payments to the plan.  Talking to my insurance adjuster is just a matter thinking thoughts.  He looks and sounds a lot like me.  I like how the guy thinks like me too.   At some point, I may begin drawing profits out of the fund.  Call it a yearly dividend.  I want to get to the point, where the fund could pay for two significant losses at once.  There is a strong possibility, that I may dip into the $600 furnace replacement coverage, in the future and that will set the fund back.  I might decide to include a no break bonus to the furnace plan, if the fund for that plan grows larger than the $600.  That’s kind of like when your car insurance lowers your deductible each year you don’t have a a claim.

What Phone Did I Buy

The model I chose would not have been available to me, had I had used the insurance plan at my phone company.  I chose the Huawei Nexus 6p and I bought it at Amazon.  Sprint doesn’t sell it and I don’t know if any other carrier sells it either.  I mentioned that I was looking at this phone, in an earlier post.  I mentioned some reasons why I was looking at this phone.  There are some serious risk reducing / prepper reasons to own this phone.  I don’t want to go too much into it now because I’m going to write an entire post on phones and explain why I chose this one, in detail.  I also want to research some other phones that offer similar benefits as this one.  I’m also going to wait until I’ve had the phone a while, to give it a more experienced review.

A Prepper’s Synergistic Benefit of Storing Your Fund In Cash

 

One final note on this topic of self insurance.  You can choose a variety of ways to store your insurance fund.  Each offers advantages over the other.  Each come with its own risks and abilities to reduce risk in your overall risk-weighted portfolio.  You can:

  • Open a bank / credit union account.
  • Use a pre-existing account
  • Use crypto-currency
  • Store cash in your home

Opening a bank or credit union account means going into one of these institutions and that extra hurdle means you might not ever get started on this plan.  On top of that, when you start out, you might only have $11 to start with.  It’s not enough to open an account.

Using a pre-existing account means keeping the funds intermingled with other funds, you have for other purposes.  If it is in your checking account, it’s likely to get spent, even if by accident, or by a temptation to borrow it.  If it’s in a savings account, it faces some of these same issues but to a lesser degree.  In either account, it increases your balance and makes you feel like you have more money to spend, than you do.  This can lead to spending on things you don’t need.

Using crypto-currency might seem like a good idea.  For some, it seems the odds are strong that you might even earn money on the deal.  The reality is, crypto-currency is a volatile store of value.  For insurance, you want something more stable.   Insurance companies tend to buy safe bonds and sometimes invest in business loans, doing their own credit analysis, in house.   They don’t rely on rating agencies to do it for them.  They hold the loans on their own books and don’t sell them in loan backed securities like banks and mortgage companies do.   As a side note, if you want to borrow from an insurance company, you pay a bit extra for the unsecuritized loan but you get a more personalized touch.  An insurance company would not hold crypto-currency because they need certainty to cover their risks of loss due to claims.

Store cash in your home.  As I mentioned at the top of this post, each method comes with its own risks and abilities to reduce risk.  When I say store the cash in your home, right away, you might think of theft.  That is certainly a risk and if it is a high risk, where you live, you might decide against this.  That said, storing cash is very simple to get started with.  You just pull the $11 (or whatever amount) out of your wallet and put it in a jar or something.  This makes a lot of sense, at the beginning, because you don’t have much to get stolen anyway.  The simplicity of it means you are more likely to get started.  You could start before you even finish reading this article.

Here is where the synergy comes in.  When you store some cash at home, you are hedging against some risks we all face in the financial markets.  The Rational Preparedness about us page, talks about the Y2K event, when people flocked to ATMs and withdrew cash.  There have been instances where financial institutions have been shut down, by governments, during economic crises.  There are also wide ranging power outages. If this happens, you could find yourself without access to your money, for a time.  You’ll be unable to buy groceries, gasoline, subway fare or anything else, you might need.  Storing your self insurance fund in cash is a good way to get started in storing some cash in your home, to protect against these financial events.  You can reduce risk by coming up with a good hiding place, using a safe, and/or moving to a better neighborhood.  If the fund grows too large for you to feel safe having it in your home, you can always open a new account later.

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