Is that smartphone protection program worth it?

My wife and I recently replaced our worn-out iPhones with brand new, shiny Samsung Galaxy S4s. As part of the sales process, the Verizon store rep recommended we get a phone replacement plan. After all, he said, if we drop or lose the phone, we could be out a lot of money.

"Is it really worth it?" my wife asked. "After all, the most we'd be out is $200 for another phone." Her initial assumption was that the phone cost $200, because that's what we were paying for it. She wasn't accounting for the full-freight price of the phone which was being reduced by virtue of our two year contract.

"Oh, no," the rep said. "That's a $650 phone. You'd be much safer if you had the phone protection plan. After all, it's only $5.18 per month."

We turned down the program (additional details PDF), but were assured we could sign up anytime in the next 30 days. That $650 number sat with me for the whole next day, until I decided to get my math out of mothballs and play with some numbers. After all, I've carried expensive phones for years and years, and I've never lost one. Neither has my wife. Of course, there's always a first time.

Let's first gather the givens. All the numbers I'm using are for Verizon, but the other carriers are quite similar. The Samsung Galaxy S4 and the iPhone 5 have the same buy-in. That's $200 with a two-year phone contract. The protection plan costs $5.18 per month.

Now, here's the kicker. If you lose your phone, you don't just get a new one. You have to pay $99. You're allowed to lose two phones in a 12-month period, but still, each has a $99 "deductable."

Here's our first chart, "Cumulative cost of phone replacement." This is what you'd pay for the replacement plan, based on how long you had your phone. As you can see, if you lost your phone right after you bought it, it would only cost you $104 to replace it. By contrast, if you lost your phone 18 months in, you would have spent $192 (given the accumulation of monthly $5.18 charges) to replace it.

Let's next look at implied savings. The sales rep said that the S4 is a $650 phone. It's actually $649, the same as the base iPhone 5. Let's look at how much you'd save if you had the phone protection plan:

As you can see, the implied savings ranges from a high of $545 down to a low of $426. If a replacement phone would cost you that much, it would be worth a protection plan, wouldn't it?

Maybe, but perhaps there's a detail that's not being included here: terminating the plan and getting a new phone. When you buy a phone and sign up for a two year plan, you're agreeing to keep the plan to help the carrier offset the discounted cost of the phone. But all smartphone plans of this type allow for early termination. Many buyers like changing their phone whenever a newer, spiffier one comes out, and the carriers count on making some extra cash on the early termination.

Verizon's plan is very similar to the AT&T early termination option that I just recently exercised. It starts at $350 and drops by $10 for each month you have your service. So, for example, if you terminate at the end of a year, you'd wind up paying $230.

That's where these programs get interesting, because instead of having to buy a new phone if you lose it, you could just terminate your plan and start over, paying another $200 for a better newer phone. You may have to go with a different carrier, but you can cross that bridge when you come to it. So let's see how that holds up under the scrutiny of arithmetic.

As you can see, your worst exposure is $550 on the very first month, down to $342 by month 24.

At this point, you can see you have two replacement strategies: via the protection plan or simply by terminating the program and buying a new phone. The obvious question is how do these options compare. Here you go.

As this chart shows, if you lose your phone in the first month, the replacement plan can save you almost $450 over early termination. On the other hand, if you lose your phone after a year, the replacement plan would only save you $289.

This allows us to frame the gamble you're taking. First, your worst case exposure, losing a phone on day 1, is $550 using the early termination plan, not $650. But given that the replacement plan has a deductable of $99, you'd wind up paying as much as $223 to replace that phone near the end of the program. Of course, the reality is you'd probably just wait out the program or pay the last few months of fees.

If you don't get the protection plan and use the early termination plan instead, your worst exposure is $550, down to $342. Compare that to adding $5.18 to your monthly bill and spending up to $124 if you don't exercise the replacement option. After all is said and done, if you don't pay for the monthly protection plan, it could cost you an extra $446 down to $119.

So that's your answer. If you're pretty good at taking care of your gear and you're willing to gamble from $119 up to $446, then don't get the replacement program. But if you'd prefer to risk up to $124 in extra fees on the chance that you'll need a replacement, go that way. Of course, if you've got a much more expensive phone, the numbers change a bit, and the replacement or protection plan you get might be worth more to you.

One final note: your carrier isn't the only one who offers a smartphone protection program. If you go to Amazon, select the Cell Phones & Accessories section, and then type in "protection plan" into the search box, you'll see a whole pile of different plans. At one point, I found a section for "protection plans," but I haven't been able to find it since. The point, though, is that if you search Amazon, you may be able to find a cheaper protection plan. Now, how good is it? Your guess is as good as mine. Read the reviews.

Update: Reader Tony pointed out you might not get the same phone. In fact, the Verizon FAQ states, "Replacement devices may be remanufactured equipment. If the same model is not available, a comparable model will be provided." So, he's right. You might wind up with an S3 instead of the S4 you originally bought. Check out the other comments below. Lots of great advice.

The bottom-line is this: your carrier's replacement program can save you some bucks -- not as many as implied by the sales folks, but some. Do you like to gamble? Well, do ya?