Nothing in life is free. This is especially true when it comes to extended warranties and insurance policies for common purchases such as automobiles, appliances, consumer electronics and other household products. One way or another, businesses will find a way to line their pockets whether you pay for it upfront or down the road.
To help you decide if purchasing an extended warranty is a good idea, I’ve created this simple guide. Be sure to read my detailed report below as well.
Standard Warranties vs Extended Warranties
Almost every manufacturer offers some sort of initial warranty coverage for their products; this is just part of doing business as mistakes sometimes happen in the design or manufacturing process.
For example, new and certified pre-owned cars are usually protected by a 3 year 36,000 mile warranty (or similar). Home appliance manufacturers (Kenmore, Maytag, Bosch, Whirlpool, etc.) usually offer standard one year or two year warranties, and most home electronics are protected by at least a 90 day warranty.
However, if you’ve bought any of the above mentioned products over the last few years you’ve likely been offered an extended warranty package by the sales associate or the checkout counter associate. These extended warranties offer similar coverage to manufacturer’s standard warranties, but they’re usually not as comprehensive and in some cases they come with deductibles you must pay.
Consumer Alert: “Extended” warranties often run concurrent with regular manufacturer’s warranties. If your new lawn mower comes with a 2 year warranty from the manufacturer, the 4 year warranty you buy from Home Depot or Lowes isn’t really a 4 year warranty, it’s actually just a two year warranty that starts two years after the standard warranty expires. Don’t let the associate fool you when they tell you the additional coverage “only” costs X amount per year (because the first two years are already covered by the manufacturer’s warranty).
Manufacturer’s Warranties vs Third Party Warranties
We all know how expensive repair bills can be. There is definitely a reassurance in knowing that your car, appliance or cell phone is covered in the event that something happens to it. But at what point does it make financial sense to buy an extended warranty? Is there a point at which extended warranties are not worth the cost?
The answer to this question can usually be found when we understand what the motivation is behind the company offering the extended warranty.
Extended warranties do one of two things for the company offering them. The company is trying to make an additional profit by selling extended warranty packages (as is the case with third party issuers) or, the company is attempting to enhance the confidence and choices of its customers by offering an extended warranty as an option (versus building an extended warranty coverage into the sales price).
When it comes to pricing and intent, manufacturer’s warranties can be a better value for consumers than third party extended warranties [but are they still worth buying?].
While manufacturers do sometimes try to inflate their profits by offering extended warranties to customers, they also seek to enhance their brand’s attractiveness to potential consumers.
Take Sears for example. On one hand, they can appease consumers seeking maximum reliability by spending more money on the design and manufacturing of a particular model of washing machine that would theoretically be extremely reliable (we’re talking military grade construction).
The down fall of course is that this washing machine would be much more expensive and would turn away potential buyers who weren’t as concerned with reliability (they’re willing to take their chances and/or make any repairs needed themselves with less rigidly constructed models).
On the other hand, they can build the same model using normal construction techniques and give the consumer the choice of whether or not they wanted to pay more money for the “peace of mind” of the factory warranty and at home service repairs.
Third Party Extended Warranties:
Companies offering extended warranties to cover products manufactured by another company are what I refer to as third party warranty companies. Like virtually every other insurance provider, their entire business model is centered on people paying more in premiums than what they pay in claims for the repair or replacement of the various products they cover.
Third party extended warranty companies are experts in evaluating the reliability of particular products and adjust the costs of their coverage accordingly to make sure (on average) they come out ahead of the consumer.
A good (actually very bad) example of “third party” insurance or extended warranty coverage is the smart phone (iPhone, Samsung, etc.) insurance coverage offered by most major cell phone carriers.
In most examples, you’re spending at least $10 a month for insurance and then have to pay an additional $250 deductible in the event you actually lose your phone (or it is damaged, broken, stolen, etc.). This is an absurd amount of money especially considering most contracts allow you to “upgrade” to a new phone after a year or two anyway. You’re literally giving money away to a third party “business”.
Other examples of rip off third party extended warranties include those “official” looking auto warranty notices you get in the mail, extended coverage options sold at the counter at Lowes, Home Depot, Walmart, Target (you get the idea) and “home owner warranties” that are sometimes offered to you when you move into a new house..
Remember, if it was a good value to the consumers, third party extended warranty companies couldn’t afford to stay in business.
Extended Warranties vs Other Types of Insurance (Medical, Life, Auto, etc.)
One of the common arguments I get from people about my advice not to buy most extended warranties is that using my theories, I “probably don’t need medical insurance or life insurance either”.
Let me be clear that there is a very big difference between consumer product warranties and life or medical insurance (or even regular automobile insurance). The biggest reason why medical, automobile and life insurance is ESSENTIAL is that you are pooling the risk of dying, hurting other people or accruing crushing medical bills.
In other words, insurance companies basically facilitate a bunch of people pooling their money together to look out for each other in the event one (or some) of them get sick or die. Of course the insurance companies get compensated for this but most people can’t “self-insure” themselves (like many large corporations do).
This is one of the biggest advantages to having an emergency fund is that you can self-insure against minor financial setbacks and not give your money away to someone else to cover it in the event something might happen.
Your emergency fund probably can’t cover major medical bills very easily or provide for your family after your death if you don’t have adequate medical or life insurance. On the contrary, you probably CAN afford a replacement phone, blender or auto repair in which case you can self-insure in these areas of your life and avoid lining the pockets of third party extended warranty companies.
Please share your extended warranty coverage comments and suggestions below!