Why An Extended Warranty Program Is Insurance You Don’t Need

by Allison W. on 2010-12-175

We’re shopping a lot these days. But here’s an underrated piece of money-saving advice: skip those extended warranty programs!

As I look around my home, I can see a lot of electrical products that I use every day without even thinking about it. For instance, there is my computer, which I use for work. Then there are the TVs, the DVD players and so on and so forth. Pretty much, it is the usual hoard of items most everyone has in their home. Probably you have the same things too.

But how many of those electrical products do you have extended warranties on? I can tell you how many we have –- exactly zero. Why? Because I don’t believe they are worth the money.

Why An Extended Warranty Program Is Insurance You Don’t Need

Here are my justifications for avoiding extended warranties:

1. An extended warranty is an extra cost.
I can tell you this much. If we had bought extended warranty programs on every single appliance we have ever bought, the total cost could probably have added up to the purchase of a great new TV. Extended warranties are just an extra expense.

The first thing I consider when buying anything new is the warranty that automatically comes with that item. Most times it will be a year at the absolute minimum. Two years is quite common and you might even have it for longer if you are lucky.

extended warranty program
Image from WSJ.com

Now I’m not saying that electrical items don’t go wrong. Of course they do: someone gets unlucky at times and buys a dud that goes on the fritz two days after the underlying warranty they get with it expires. In the end, you need to make a choice whether or not to extend your warranty. But you’ll have to consider its cost.

2. Check your credit card benefits for this freebie.
Many credit cards provide extra insurance coverage at no cost as part of their benefits to customers. This is actually pretty common among those cards with top credit card deals. If I were considering getting a warranty, I’d first make sure to read the fine print on my cards to avoid any redundancy.

3. The warranty you buy may be redundant.
I just mentioned redundancy. Know that many items already have built in warranties that could cover you for a few years. Don’t be duped into buying additional coverage if you’ve got that insurance already in place! Once the original warranties expire, you may just want to wing it. You may be better off just taking the risk of replacing your item at a later time, than end up paying for an unused service. After all, insurance on “stuff” is much harder to justify than other forms of insurance. Just like with credit cards, always check the small print when you purchase something.

4. Instead of spending, why not save?
To my mind, it makes more sense to save the money you would spend on warranties and use that if ever you need to get something repaired or replaced. You could do this with your appliances. This is just a completely hypothetical case, but supposing you have twenty appliances. Now let’s assume that a three year extended warranty program costs about $70 for each one — this adds up to a whopping $1,400! If you saved that cash instead, that’s a lot of money you could use towards replacing anything that could possibly go wrong. In fact, you’d be seriously unlucky to have more than one thing go wrong anyway.

Of course this is a gamble –- but it’s one where the odds are very firmly in your favor. Some people always want to be covered regardless of whatever they buy, but if you are like me and you would rather save your cash, then you should put it in a separate high interest savings account (and christen it your “warranty fund”), just in case you do need it for any reason.

Think very carefully before you buy a warranty. Salespeople will always try and tempt you with an extended warranty, but don’t feel pressured into buying one. They will be programmed to sell you the benefits, but don’t be swayed. It’s important to understand the value of taking out insurance against your appliances and electronics, and the truth is? It’s really not worth it.

Copyright © 2010 The Digerati Life. All Rights Reserved.

{ 5 comments… read them below or add one }

Kosmo @ The Soap Boxers December 17, 2010 at 10:36 pm

Several years ago, the cashier at Best Buy tried to sell me an extended warranty on a $15 phone 🙂

Jared December 18, 2010 at 10:55 am

This was good advice that i used to follow. But its not as good now.

Extended warranties are a gamble but there are times its needed.

The whole one year warranty on most items are a thing of the past. There are still companies that offer warranty but they dont cover the shipping.

I recently had experience trying to use the creditcard warranty protection its not as convenient as they make it out to be.

I bought a sylvania tv from target feb 2010 and it died nov 2010. The warranty on it? 3 months labor 1 year on parts so even with the creditcard that only made the labor 6 months. So im out of luck.

I bought a coby dvd player for 30 bucks and paid 10 bucks for the extended warranty. In less than 3 weeks the player remote went bad. If i have the manufacturer fix it, its 10 bucks shipping. So paying 10 bucks for the extended warranty in this case helped me.

The costco 2 year warranty on laptops. They said they extend the warranty for 2 years. So its almost 2 years now and my battery died. I called to get warranty on the battery costco said the battery isnt covered.

So my suggestion is that if the manufacturer isn’t a full year on parts n labor and the brand is like sylvania and coby or other cheap brands, even the good brands Read and ask what the factory warranty covers and deceive whether you want to deal with the hassle of dealing with the manufacturer and their lack of warranty and service or the creditcard protection benefits which is a totally different company from your card issuer. They don’t really protect you mych except for fraud purchases.

Really read and ask them what are you covered for same with rental car insurance benefit from a car it might not be any insurance at all.

Rod @ tulsa attorney December 18, 2010 at 12:46 pm

The way I see it, they pay some smart people to figure out exactly how much they have to charge for the warranty to make sure they always come out ahead. It is like gambling with the odds in favor of the house.

I say save and self insure.

Mark @ Demyst December 23, 2010 at 11:04 pm

Great post.

The warranty insurers sure do make big bucks on these policies, especially the low value ones (like warranty insurance on mobile phones). However sometimes they can really help, for example extended warranty insurance on cars can be sufficiently competitive (and more importantly protects against a high cost incident).

No one wants to think like an actuary, but when you’re shopping, just do some sort of common sense calculation :

e.g. $X is the total cost to me if something really bad happened to this product (for a car $X might be $10k … for a TV $X might be $200 … for your computer $X might be $5k). Make sure $X includes other costs (like if you can’t get to work because you’re wasting time trying to pay for repairs). Figure out if there is a Y% chance of this happening in a given year. E.g. for a car for many people Y might be 5%, for a technology product it might be 20%. A good rule of thumb is to think about the typical lifespan of a product. Technology doesn’t last long. Then multiply. So for a TV if $X is $200 and Y is 20%, then the insurance is worth $40 to you. Actually it’s probably worth more than $40 to you because you’re likely risk averse. Ignore all that, just consider it a benchmark. If the value is $40-$60 to you … and they want $100/year, don’t bother.

Personally I don’t believe in extended warranties except on big items like cars (because of what’s known as the ‘risk of ruin’)

Hank December 25, 2010 at 3:27 pm

Mark hit the nail on the head. It is all about expected value. What is the cost of the loss of the item or the cost of repairs versus the cost of the extended warranty times its probability of actually happening. These companies make so much money off of extended warranties because they are insuring something that is not likely to happen.

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