Is Cell Phone Insurance Worthwhile?

Buying a new wireless phone typically means hearing a sales pitch for cell phone insurance. It sure sounds reasonable. "Peace of mind for that important device that might be lost or stolen," says the sales rep.

But many consumers later find their insurance policy isn't everything they thought it was.

"The U.S. Cellular representative suggested that I needed insurance because the phone was expensive. I figured it wasn't a bad deal for an additional $5.00 per month, so I agreed and signed the paperwork," says Riki of Madison, Wisconsin.

When his phone's speaker was damaged, Riki called his insurer -- The Signal -- and was told that although his model of phone had been discontinued, he would be sent a comparable phone with the same features.

"I constantly use the MP3 feature on my phone, so it was very important the replacement phone have this feature," he said.

Riki received his replacement phone and was shocked to discover it was nothing like his first one.

"The replacement phone didn't have external memory, radio or voice recording, and it didn't even have an MP3 feature, the one thing that The Signal promised I would have."

Contacting the cell phone company usually won't help because the insurance policy is between a third-party insurer and the cell phone owner.

"I called US Cellular and they agreed that I should have at least received an MP3 phone, but there are limits to what the carrier can do because the policy is with another company," says Riki.

He again called The Signal and this time spoke with a supervisor.

"She explained that if they do not have the same phone as a replacement, they could send whatever phone they wanted and if I didn't like it, I could purchase a new phone."

Not Uncommon

In fact, what Riki experienced isn't uncommon because most policies state that a replacement phone might be a different model. Additionally, most consumers don't take the time to read the small print and seldom will a salesperson tell you all the details.

For instance, some policies won't cover a device such as a Treo or BlackBerry, but to know that you would have to read the policy which will tell you to visit the website of the carrier for a list of "ineligible" devices.

Furthermore, the policy will include the amount of your deductible, something that many consumers aren't aware of until they file a claim.

In Riki's case, he paid his premiums for 14 months and then paid a deductible, ending up with a replacement phone nothing like his previous one. He comments, "I've warned my family about this fiasco because they are paying for insurance just as I was."

Most carriers will give you at least fourteen days to decide if you want insurance, so don't be rushed into a decision that will come back to haunt you.

Like extended warranties, phone insurance may wind up being worth a lot less than you pay for it.

Do you need cell Insurance ??

You’ve finally settled on the perfect new cell phone with all the latest features. You’ve chosen the accessories and picked a service plan.  Now the salesperson asks if you want to buy insurance to protect your purchase.

It’s only $4.99 a month and you’ll be covered if the phone is lost, drops in the toilet or is run over by a car. So you say yes. Did you make the right decision?

Your new phone comes with a manufacturer’s warranty. But that only covers equipment failure caused by a defect or malfunction. You’re out of luck if the phone is lost, stolen, or accidentally damaged.

Dwight Moore with Verizon Wireless, says customers like cell phone insurance because they know if something happens to their phone, they’ll quickly have a replacement. In most cases, he says, it will arrive overnight and will be “exactly the same or similar” to the one you had.

Why consumer groups don’t recommend it

“We think it’s almost always a waste of money,” says Consumer Reports Editor-At-Large Greg Daugherty.

“You can insure every gadget in your life if you want these days,” Daugherty says. “We think all this little insurance is just adding up to too much in many cases. People really ought to be focusing on the big risks.”

San Diego’s Utility Consumers’ Action Network (UCAN) also advises most consumers to skip cell phone insurance. UCAN’s Michael Shames tells me they get “lots of complaints” from people who did buy this coverage.

Some complain their replacement phone is used, what the industry calls “refurbished.” Others are surprised by the deductible, usually around $50.

Shames calls that “one of the dirty little secrets about phone insurance.”

Shames says insurance might make sense for some people — those who are prone to drop their phone, get it wet or somehow disable it. “It might be useful if you happen to work on building skyscrapers and you tend to drop your phone 30 or 40 stories,” he says.

It could also come in handy if you’re buying a high-end PDA phone that would cost you $500 or $600 to replace. Just remember, he says, “your replacement phone is likely used.”

An insurance nightmare

Justin Leavens, a businessman in Sherman Oaks, Calif., is one of those who complained to UCAN.

He purchased insurance coverage when he bought a fairly expensive phone from Verizon Wireless. “My cell phone is my lifeline,” he says. “So I couldn’t really be without it for more than a few days.”

When the phone was damaged, Leavens filed a claim with the insurance company, Asurion, and was told he would have a replacement phone “the next day.” When it didn’t arrive, he called Asurion again and was told they didn’t have his phone in stock. His choices were: get on a waiting list or take a different phone that did not have the same features as the broken one.

Leavens says he suggested comparable phones that would make him happy, but the insurance company would not agree to that. He told them his local Verizon store had his phone. He offered to go pick one up if they would pay for it. Again, they said no.

“It really appeared like they were doing everything in their power to get out of paying for my cell phone,” he says.

Totally frustrated, Leavens went to the Verizon store and “basically begged for help.”

To make a very long story short, he says Verizon convinced the insurance company to pay for a new phone. Leavens picked it up right away, but he told me he had to wait 2-and-a-half months for his reimbursement check.I made several requests for a comment from Asurion, but there was no response to my calls or emails.

The fine print
When it comes to insurance, it’s the actual policy that counts, not what you see in the colorful brochure or hear in the sales pitch. The policy is a contract between you and the insurance company, and these cell phone policies have numerous limitations and exclusions not spelled out in the sales material.

For instance, the policy for Cingular phones do not cover “normal wear and tear” or a cracked display “that does not affect the mechanical or electrical function of the unit.”  And while the sales brochure promises, “a replacement is just a call away,” the policy is less generous. It says the company has the right to “repair or replace” the phone. That’s a big difference. And if they do send you a replacement, “colors, features and accessory compatibility are not guaranteed.”

Before making a decision, ask for a copy of the actual policy and see what it covers and what is excluded.

What should you do?
Say no to insurance coverage at the sales counter. Take some time to think about this purchase. You don’t have to make an impulse decision in the store. Cingular gives you 30 days. Verizon Wireless customers have 15 days to decide.

Consider what you’re really buying. While the transaction takes place through your wireless company, you are actually buying the policy from an independent third-party. If your claim is rejected, the wireless company may not be able to help.

Cell phone insurance is not like homeowners or auto insurance. With these policies if you have a covered loss, you get money from the insurance company. With phone insurance you get merchandise — a phone — instead of money.

And consider this. You can go online and get some great deals on used cell phones. If you lose or damage yours, it may be cheaper to simply buy a new one out of your own pocket with the money you didn’t spend on insurance.

Taking action
A class action lawsuit filed in Miami claims the insurance companies selling this coverage are using “deceptive and outrageous” practices. The suit contends the refurbished phones people get are worth less than the original phones.

MSNBC.com has learned a preliminary settlement has been reached in this case and will be presented to the court later this week. If approved, the settlement would affect as many as 13 million people who bought cell phone insurance.

How to save money on: insurance

If you're struggling to make ends meet, one obvious place to cut costs is to stop paying for something that gets you nothing. I'll bet you've looked more than once at an insurance bill and asked yourself the simple question: "Why?"

The average American spends more than $2,000 each year on auto, life and homeowners’ insurance. And what do you get for that money? Not very much. For example, only about one in 15 drivers makes an auto insurance claim every year.

On the other hand, you probably know better than to question the need for insurance. Even if you've never had an accident, you know your time will likely come. And when it does, it’ll be costly. The average auto insurance claim payment is nearly $4,000. Plus, auto insurance is required by law, so you don’t really have a choice.

It is not required that you overpay, however, and many people do just that. Here are a few tips you can use to pare down your insurance bills without putting yourself at unnecessary risk. I'll focus on auto insurance, but mix in a few tips about life and homeowners policies as well. And many of the principles apply to any kind of insurance you buy.

It helps to think of insurance as a concept as well as a product. Insurance was designed centuries ago to ease catastrophic losses by individuals by spreading risk over wide pools of contributors. One oft-told story has it that Chinese traders invented insurance by spreading their goods among each others' trading ships, so that no merchant would be wiped out if a single ship was lost at sea.

Notice I used the word "catastrophic." Insurance was never designed to make your life easy, and it's not really designed to make you whole after an accident either. It's designed to prevent you from being wiped out. If you get in a small fender-bender that requires some paint touch-up, you should expect to pay for those losses yourself. Save the insurance for the big event when you really need help.

In practical terms, this means most people are better off keeping deductibles on their policies high. The two most common optional coverages on auto policies are collision and comprehensive – collision covers the cost of repairing your car after accidents that aren’t covered by someone else’s policy, and comprehensive covers everything else (mainly fire and theft). Since you shouldn't make a claim for a $565 repair, you shouldn't pay for that level of coverage either. Raising the deductibles on your auto insurance policy is probably the single quickest way to save money. How much? Raising the deductible from $200 to $1,000 on comprehensive insurance will save an average of 40 percent or about $100 per year.

As a matter of sound financial planning, you should "self-insure" against the cost of these smaller incidents. That means when you raise your deductible to $1,000, you should simultaneously put $1,000 in an interest-bearing account that's earmarked specifically for small auto-related troubles. This way, when a theft or fire occurs, you can cover the expense relatively painlessly. In the meantime, you have the extra $100 each year – not your insurance company -- and you earn the interest.

There are many consumers who should consider dropping collision and comprehensive coverage altogether. Remember, these insurances are designed to protect you from a catastrophe. If your beloved clunker is only worth $1,800 and has a real replacement value of $1,200, it doesn't make sense to pay for comprehensive coverage with a $1,000 deductible. Many consumers fail to realistically assess the replacement value of their car and the real value of their comprehensive and collision coverage. In 2006, the last year for which figures are available, the National Association of Insurance Commissioners said 77 percent of drivers bought comprehensive coverage and 72 percent bought collision. I know there are more clunkers out there that that. This is why it's so important to reassess your insurance policy every year.

When should you stop paying for collision and comprehensive? It's a personal choice, but here are some rules of thumb: As soon as you get to the point where you wouldn't spend $2,000 to fix your car, drop the extra coverage. Or, if you'd like a more complex formula that's often used, drop coverage when your annual premium multiplied by 5 exceeds the value of your car. If you already have that $1,000 set aside as your own “self-insurance" policy, that money can ease the blow if your car is stolen.

There's no way to skimp on the third main element of most drivers' insurance policies: liability. In fact, many insurance experts think consumers generally buy too little liability coverage. Minimum coverages are specified by each state's insurance regulators. Here's one list of state-by-state requirements.

You will often see liability insurance expressed as a series of three numbers, like this: 25/50/10. That means your state requires $25,000 in coverage for a single person’s injury in an accident, $50,000 in coverage for all people who might be hurt, and $10,000 coverage for any property damage. It’s important to note that who gets paid by your insurance company after an accident varies based on whether your state is a “tort” state or a “no-fault” state. In tort states, the responsible party’s insurance firm pays. In no-fault states, your insurance will pay you no matter whose fault the accident is. So if you skimp on coverage, you might actually be skimping on your own payouts. Twelve states currently have no-fault rules, according to the Insurance Information Institute (click for a list).

How much coverage should you have? Consumer Reports last year recommended 100/300/100 for an average middle-class worker. To be more specific, your coverage should grow with your income and assets. Think like a lawyer for someone you've hit in a car accident. If you have assets in excess of $300,000, someone might sue you for their value. So you should have at least enough liability coverage to protect your assets in case of an accident.

One other thing to look for: Many insurance companies load up policies with unnecessary extras like roadside assistance or rental car reimbursement. While roadside plans from insurers can be a good deal, make sure you aren't covered twice (perhaps by AAA, or your cell phone or your car manufacturer). 

Rental car reimbursement can be handy, but it doesn't fit into the category of preventing catastrophe. In this economy, it's probably a luxury you can live without.

Even if you've done all these things to keep your insurance premiums down, you should take the time to get price quotes from competitors once each year. Auto insurers have a secret sauce they use to price policies. It includes arcane and unexpected items like your credit score. The only way to find out if you are paying a fair price is to see what the competition charges. Make sure you compare apples to apples when pricing polices -- same collision deductible, same liability and so on. Some insurers make that difficult, but it's worth the effort.

Other insurance tips

Finally, if you want to switch providers, do a little background check before you do. About half of U.S. states maintain extensive databases of complaints against insurers. The numbers are boiled down to a single rating called a "complaint ratio," which is essentially the number of complaints per customer each company gets. If you are thinking of signing up with a new company, make sure you aren't jumping to a leaky ship by first checking the complaint ratio database on your state's regulators Web site. How do you find that?

Here's a link to a state-by-state listing of insurance commissioners

Homeowners 

Once consumers get into a home, they often allow their bank to pay their homeowners' insurance automatically through escrow payments. Then they forget all about it. Big mistake. Homeowners premiums can vary widely and also can be impacted by seeming unrelated items, such as a change in credit score. It's important to get competitive bids for your home insurance at least once every few years. Also, it's really important to avoid filing homeowners claims, and there's evidence that you shouldn’t even place a call to your insurer asking about whether or not you should file a claim. Insurers share information on claims through a big database called CLUE -- Comprehensive Loss Underwriting Exchange. Sometimes, insurers make entries simply based on consumer inquiries. Avoid getting into this database at all costs. Handle small home accidents yourself.

And, if you've done anything to make your house safer – such as adding an alarm or helping to pay for a new fire station nearby -- make sure your insurer knows about it.

Life

Life insurance comes in so many flavors that I can't address then all in this column. My colleague Laura Coffey covered most of the basic ways you can save on life insurance in a recent column.

A few points should be stressed. Just like any other kind of insurance, life insurance should be there to prevent a disaster, such as premature death of a family's wage earner. It should not be confused with an investment vehicle. Life insurance policies that are bound up in retirement plans are generally a bad deal, and they are almost always confusing. Keep it simple. Buy what you need to take care of your loved ones if you die. How much do you need? Here's one calculator

The most common mistake people make is ignoring other sources of income available to the surviving spouse, such as Social Security benefits, when making the calculation. You'll need less insurance as life goes by and the kids finish college.

The best way to save money is to be healthy. Life insurers punish smokers with higher premiums. Ditto for those with high blood pressure or heart-related health issues.

The good news is that life insurance rates, overall, are plummeting. Premiums dropped 50 percent from 1994-2007 according to the Insurance Information Institute, thanks to better risk-assessment formulas and, naturally, competition.