Richard Lowe typically doesn’t buy an extended warranty when he purchases a product. However, when he plunked down almost $700 for a robotic vacuum cleaner in 2015, he concluded that paying $85 for an extended warranty was a good idea, because the relatively new technology had multiple moving parts.
It turns out that he made the right decision. The robotic vacuum cleaner broke almost exactly 1 year later, just as the salesperson suggested that it very well might do. Lowe walked into a Best Buy with his broken floor-care appliance and walked out with a new robotic vacuum cleaner.
This is the best-case scenario for a consumer. Lowe’s extended warranty ensured that his robot would be replaced at no additional cost to him if it broke after its original warranty expired. Consumers often face a decision on whether they should add an extended warranty to their purchase, and the decision typically has to be made quickly at the point of sale.
It seems that consumers generally are skeptical when it comes to buying an extended warranty. Seventy percent of people are unwilling to buy one, mostly because they don’t believe that the extended warranty is worth the money that they pay for one in the long run, according to a survey by The Warranty Group, which provides extended-warranty services to manufacturers and retailers. Your decision on whether it’s a good idea for you to purchase one depends on whether you can afford to repair or replace an item if it’s broken and how dependent that you are on the product, according to the 12 experts whom we interviewed who have experience on both sides of the extended-warranty business.
THE NITTY GRITTY. Extended warranties are like insurance: You pay for something that you might never use, says Matt Pinsker, who is a lawyer and adjunct professor at Virginia Commonwealth University. “Companies offer extended warranties, because it is more likely they will get more money selling them than they will have to pay out in claims.”
Extended warranties can be purchased through a one-time payment or, increasingly, through monthly installments that seem to lower your pain at the register. Our research found that extended warranties typically are underwritten by small insurance companies that are owned by major insurance companies. (For example, AppleCare is serviced by Illinois National Insurance, which is a subsidiary of AIG. First Colonial, which underwrites automobile extended warranties, is a subsidiary of Allstate Insurance.) Retailers receive a commission when they sell an extended warranty.
Salespeople persuade shoppers to purchase an extended warranty by saying that it saves them money if the product were to fail and they wanted to repair or replace it. What salespeople don’t tell consumers is how much money that companies make when they sell that peace of mind to the customer. They also don’t tell you that the chances are that you might not need it. “[Extended warranties] bring in more money [at an automobile dealership] than the Sirius department, the parts department and the sales department,” says Roberto Fabris, who is a 30-year veteran of automotive business development and marketing. “It’s the profit center of the dealership.”
Extended warranties provide a revenue double dip for companies that underwrite them. The companies not only earn commissions, but they also reap the profits after those commissions are invested. “A lot of our income comes from the ability to invest those monies [from extended-warranty purchases] in U.S. stocks,” says Doug Timmerman, who is the president of Ally Financial, which underwrites extended warranties for automobiles. In other words, companies benefit tremendously when consumers are convinced that they should buy an extended warranty.
Repairs are at the heart of the extended warranty. Consumers often don’t know until after a product fails what exactly their extended warranty covers, how they can get the product fixed and how much money that the extended-warranty provider is willing to spend to fix the problem. The cost of the repairs is important, because most extended warranties limit what will be paid to repair a product. For example, our research found that you could purchase a used vehicle for $6,000 and spend $2,500 for an extended warranty that has a $3,000 repair limit. If, say, the engine were to fail and repairs cost $3,500, then you’d have to pay $500 out of pocket to get the repair.
You also should determine who is allowed to perform repairs. Federal Trade Commission suggests that you ask this upfront. In the case of automobiles, Timmerman agrees. “Be aware of any restrictions regarding where you can take your vehicle for repairs,” he tells Consumers Digest.
FINE PRINT. Extended warranties for automobiles often include limitations in coverage that might leave you on the hook for the cost of repairs.
Automobile dealers and cellphone-service providers, for example, tend to do their repairs on-site, and cellphone manufacturers do so through the mail. So if you have a favorite automobile mechanic, you might not be able to use him/her, and consumers might be penalized if they use a third-party cellphone-repair shop. Large appliances require in-home repairs, which often means that you have to use a repair company that’s predetermined by the extended-warranty provider. Depending on where you live, you might have a long wait for repairs instead of being able to use someone who is closer to your home and has time to schedule a repair that’s more convenient for you.
It also is important for you to find out the types of repairs that are covered by an extended warranty, which is something that all contracts should specify. John Butcher, who worked as a technician and warranty adjuster at two different automobile dealerships, says he frequently dealt with customers who expected repairs to be covered under their extended warranty, only to be informed about multiple loopholes that never were mentioned, such as requiring documentation on previous maintenance. Although Butcher mostly worked with automobiles, his experience with the extended-warranty-claims process taught him that it’s important for a consumer to ask whether product replacement is included in the extended warranty in case the product can’t be fixed.
SPECIALIZATION RULES. Automakers’ warranties typically span 3 years or 36,000 miles, but a few automakers cover their vehicles for a longer period. These longer and more comprehensive warranties cover additional repairs, which has caused automobile dealerships and the companies that underwrite extended warranties to be more creative with the items that are covered, Fabris says. Today, automobile extended warranties increasingly include add-on warranties that cover only one or a few related parts. In other words, you now might purchase an extended warranty on the vehicle, one on its tires and wheels and even one on its key fob, if the vehicle has one.
Automobile extended warranties now even address local issues, says Tim Meenan of Service Contract Industry Council, which is a trade association. For example, in Florida, you can get an extended warranty for appearance care that’s targeted to the May and September “lovebug” seasons. The acidity that’s in a lovebug carcass can pit an automobile’s paint if the bug isn’t washed off it quickly, according to University of Florida. General Motors charges $595 for a 5-year vehicle-appearance extended warranty that covers exterior paint. When we shopped online for an economy paint job, we found that it costs about $300–$500. However, a high-quality paint job costs $1,000–$5,000.
CRACKED COVERAGE. You now can buy an extended warranty that covers cracked cellphone screens, but you typically have to pay at least some of the cost of the repairs.
Within the past 3 years, automobile extended warranties also emerged for key-fob replacement, because it can cost you up to $700 to replace one, Meenan says. New vehicles typically use a smaller fob that has an embedded computer chip and isn’t inserted into an ignition slot, as is a metal key or a larger fob, and these have proved to be easier to lose. Key-fob-protection extended warranties typically range from $240 to $299 for 5 years of coverage. However, our research found that if your key isn’t the latest chip-embedded fob, replacement costs run from $70 to $250, which makes an extended warranty unnecessary.
Another typical automobile extended warranty is for chips in the windshield. However, you should check your automobile insurance first and your state’s laws before you buy an extended warranty to cover a vehicle’s windshield, Meenan says. For example, if you live in Florida, the law requires a standard automobile insurance policy to cover windshield repairs at no cost. In other states, some automobile insurance policies add windshield protection for as little as $2 per month per vehicle.
Otherwise, your cost to fix a windshield typically is less than what the deductible is for an automobile insurance policy, so you end up footing the bill. For example, we found in June 2017 that a windshield repair for a 2017 Honda Civic sedan cost $295 via Glass.net, while the standard automobile-insurance deductible was $500, according to the financial-education website Thismatter.com. Experts say that, despite this gap, it makes more sense to add windshield coverage to your automobile insurance policy than it does to buy an extended warranty that covers glass, because the extended warranty will cost more than does the repair. At press time, no extended-warranty company would divulge the price of a windshield extended warranty, because they say dealers set the prices, and they weren’t willing to tell us the price that they give to dealers.
BUYERS BEWARE. Consumers frequently are persuaded to buy an automobile extended warranty when a salesman tells them that an extended warranty would add only, say, 35 cents per day to their monthly vehicle payment, Fabris says. However, you should know that a 5-year extended-warranty plan at 35 cents per day costs $638 total, not to mention the interest, depending on your loan terms. Fabris says that, in his experience, 85 percent of financed automobiles include an average of $1,500 in extended warranties. Other sources agree with that average.
IN SERVICE. Some extended warranties for appliances include repair costs in the amount of money that you might receive for a replacement.
Some extended warranties require an automobile owner to have a meticulous maintenance record for their vehicle, so a repair will be covered. This requirement can be difficult, if not impossible, for you to meet if you bought your vehicle used. It’s a loophole that isn’t always mentioned, Butcher says. In other words, a repair claim might be rejected, because the vehicle owner didn’t keep a service receipt for an oil change, for example. Butcher says he has seen car dealers take a trade-in used automobile and put it out on the lot knowing it had a problem and sold an extended-warranty contract to the buyer.
Another common escape clause is one that covers “internally lubricated parts” only as long as all of the seals, gaskets, etc., remain intact, according to New Hampshire Department of Justice (NHDOJ). In other words, if a $4 transmission seal leaked oil and you didn’t fix it before the transmission became damaged, then the extended-warranty company might not pay for your $1,500 transmission repair, NHDOJ says.
PHONE HOME. Experts whom we interviewed tell us that one product for which an extended warranty might make sense is a smartphone.
According to Statista, which is a market-research company, the average selling price of a smartphone in North America is $567. Cellphone service providers have extended warranties that can be added to a phone plan for as little as $5 per month. If you keep your smartphone for 2 years, which is about the average period, according to Kantar Worldpanel, which is a market-research company, then the extended warranty would cost you $120, which is a lot less than is the cost for you to replace your smartphone.
The latest trends in extended warranties for smartphones emerged, because some of the breakage that occurs most frequently isn’t covered by the manufacturer’s warranty, Meenan says. “If you upgrade your service contract to include accidental damage and handling, then you’re covered for when it just goes on the fritz or when you drop it,” Meenan adds.
Cracked phone screens are a common problem that now is addressed by the latest extended warranties. Unfortunately, not all extended warranties cover such repairs in the same way, and nuances abound.
According to Motorola, one-third of U.S. smartphone owners crack their smartphone’s screen. A screen on a smartphone that uses the Google Android operating system, for example, can cost $100–$200 to repair.
Most cellphone-service providers and smartphone manufacturers provide an extended warranty that covers screen repair.
Apple charges $129 for its 2-year AppleCare extended warranty, but owners still have to pay $29 to fix a cracked screen—compared with $129–$149 without the extended warranty. (Apple iPhone models that are older than the iPhone 6 cost $79 for you to replace a screen under the extended warranty.) Apple limits owners to two screen-related claims per year. After that, the smartphone owner pays the full price to replace the screen. This extended warranty turns into a good deal only if you crack your screen more than once. The cost of the extended warranty and one replacement—$158—is more than the cost of replacement would be if you don’t have an extended warranty—$129–$149. We also found third-party smartphone repair shops that charge $59–$115 to repair a cracked screen on an iPhone, so AppleCare is pointless if you buy it just to cover screen repairs. Our research found that Google and Samsung offer similar plans.
Verizon Wireless addresses cracked screens through a two-tiered (read: higher priced) extended-warranty program. A basic extended warranty at Verizon costs $5–$7.15 per month, but it doesn’t cover cracked screens. For $11 per month, or $132 per year, Verizon’s Total Protection extended warranty covers cracked screens and provides same-day repair if you’re located in an area that provides the repair service.
As with AppleCare, you still have to pay for a screen repair, however—$49, which was lowered from $99. You can make three cracked-screen claims per year, after which cracked-screen repairs cost you 100 percent out of pocket—$129. Verizon makes its cracked-screen extended warranty available in 65 percent of its markets, with more in the works, and it has remote technicians in 115 cities who will “come to you” to provide the service, Verizon spokesperson Todd Oberstein says.
AT&T’s extended warranty costs $8.99 per month, and a cracked-screen repair costs you $89. However, the extended warranty is available only for certain devices and in certain markets. We couldn’t determine which devices or markets were eligible. T-Mobile’s protection plans cost $7–$15 and operate on a tiered system that’s similar to AT&T’s system.
Sprint’s basic extended warranty costs $9 per month, but it has five different tiers of pricing based on the value of the device and whether you have a repair or replacement plan. That means that it can cost you from $50 to $250 to replace a cracked screen, depending on the device that you have.
PLUG IT IN. Appliances provide another situation where an extended warranty might make sense, because the failure rate of certain appliances is high, particularly because the amount of technology that’s in today’s appliances has increased, and appliances typically require an in-home repair.
Mark Huffman of Consumer Affairs says it doesn’t make sense for you to buy an extended warranty on a small appliance that costs less than $100, because it’s less expensive to buy a new appliance than it is to buy an extended warranty. In fact, it’s so expensive to repair small appliances that the list of what isn’t covered under an extended warranty is longer than is the list of what is covered. So you would spend money on an extended warranty that might result in a rejected claim when you could have spent that money to replace the broken appliance.
We found that extended warranties cost an average of about 16 percent of the appliance’s price across the board, but the cost can go much higher. Ideally, the cost of the extended warranty for an appliance should be slightly less than is the average cost of the typical repair for that appliance, says Randy Goldfein of appliance retailer Abt. Abt follows this standard, as does Yale Appliances. FTC advises consumers to educate themselves on the likelihood of repairs and costs before they decide whether to buy an extended warranty.
Consumers also should compare what they get for their extended-warranty money. For example, one retailer charges $209 for a 3-year extended warranty on a washing machine that costs $849, while one underwriter of extended warranties charges $114. The retailer’s plan is expensive at 25 percent of the original cost of the machine, but it has no deductible for repairs or parts, and if the retailer deems that the washer isn’t repairable, it will pay you up to the price of the original washer, so you can replace it. Parts and repairs that aren’t covered by the extended warranty still get a 25 percent discount, which is an incentive for you to buy the extended warranty. The underwriter’s warranty for the same washer is only 13 percent of the original cost, covers mechanical and electrical failures and requires no deductible for parts or labor. However, it limits the replacement value to $500, and repair costs go toward that limit. In other words, if your washing machine requires a $200 repair and later it breaks down completely, you’ll get only $300 to replace it, not $500.
Goldfein notes that consumers should be aware that manufacturers of some brands of appliances improve their original warranty terms if you follow certain procedures, which might eliminate the need for you to buy an extended warranty.
Goldfein also says it’s important for you to understand that if you buy an extended warranty for, say, a refrigerator, the total repair coverage won’t go beyond the price of the refrigerator. In other words, if you paid $2,000 for a refrigerator and it later required multiple repairs that cost $2,000, you’d have to pay out of pocket for any repairs that would be required later.
Washers, dryers and dishwashers have the highest fail rate among all appliances at 21.5 percent over a 2-year period, which is followed by refrigeration products at 18.4 percent and cooking appliances at 15.7 percent, Goldfein says, based on store data. The average price of a washer or dryer at Abt is $727, and the average extended-warranty price for either is $110. The average cost for a repair is $272, so, in this case, Goldfein would argue that it makes sense for you to buy an extended warranty. “If you buy a refrigerator and the price of the warranty is 15 to 20 percent of that, then you should have peace of mind in [buying] the coverage,” Goldfein contends.
Rob Drury, who is a financial advisor who advises clients on insurance needs and coverage, isn’t so convinced. “One shouldn’t buy the warranty unless one cannot reasonably afford a repair or replacement,” he says.
HAPPY ENDING. After the excitement of buying a new item—and the extended warranty—fades, you should take the time to review what the warranty covers as well as its terms and conditions for when you file a claim, Meenan says. “You can look at the terms and conditions. If there’s something you don’t like, you pick up the phone, call a 1-800 number and get 100 percent refunded for those first 30 or 45 days. No questions asked,” he says. If the plan isn’t what you thought it was, you have some protection. Every policy that we reviewed—two for automobiles, four for smartphones and two for appliances—includes a cancellation clause.
As of press time, 18 states had some form of cancellation policy. If you live in one of those states and you see in your extended warranty that repairs can’t be performed by the repair shop that you choose or that your extended warranty doesn’t include, say, the replacement of the product even though you wanted that coverage, you can cancel the warranty within 30 days after you bought it.
Consumers also should be aware that most states require licenses and regulate extended-warranty companies, so it makes sense to verify their credibility. Meenan says that if you buy an extended warranty, you should visit National Association of Insurance Commissioners website (eapps.naic.org/cis/). “Find the list of licensed extended-warranty companies in your state, and make sure [the company you’re about to buy from] is on the list, or make a call,” he says. If you never heard of the company, then you should cancel the extended warranty.
Ultimately, extended warranties are sold with the intention to make the insurance company money, not to protect the consumer.
Debra Borchardt covers business topics for Forbes and Seeking Alpha.