Extended warranties by the numbers

In short

A friend of mine once paid $189 for a warranty on a $600 television, and he never made a single claim. If you are holding a quote for an extended warranty right now, you are in good company, because the question is whether the price makes sense for you. The price of a warranty is a bet on the cost of a repair. The seller sets that price so the seller comes out ahead across many buyers. Before you sign, ask what the product costs to fix, how likely it is to break, and what the maker already covers for free. Check whether a credit card or a savings cushion could do the same job for less. Do the arithmetic on paper, and the answer tends to show itself.

The whole of it

What it is

I once watched a man at an electronics counter nod along while a clerk described a plan as peace of mind. He bought it, and he felt good for about a week. An extended warranty is a separate contract, sold for an extra fee, that promises to pay for certain repairs after the maker's own coverage ends. Some are sold by the store. Some are sold by the maker. Many are sold by outside companies that the seller only represents.

You have probably heard the words warranty and service contract used as if they meant the same thing. They are close cousins, but they are not twins. A warranty comes with the product and is included in the price. A service contract is bought on top, and the Federal Trade Commission treats it as its own kind of agreement. The company that issues the plan is called the obligor, which just means the party that must pay for the repair. Learn that name, because that company, and not the store clerk, is who the buyer will be dealing with later.

How it works

A neighbor of mine tells the story of a dishwasher that quit in month fourteen. Her plan sold her a flat fee up front. In return, the plan administrator must cover the listed repairs, after any deductible the contract names. The plan also sets limits. It lists what counts as a covered part, what counts as wear, and which problems it will not touch. Most contracts exclude damage from drops, spills, and misuse. Many also exclude cosmetic flaws and routine upkeep.

Here is the part worth sitting with. The seller prices the plan so that the money collected is larger than the money paid out. That is not a scandal. That is how insurance of every kind works. It does mean that the average buyer pays more than the average repair costs. A plan can still be a fair deal for one person and a poor one for another. It depends on how costly the repair is and how well the buyer could absorb that cost alone.

Think of it as a trade. The buyer swaps a small, certain cost today for protection against a large, uncertain cost later. A trade like that makes sense when the large cost would truly hurt. It makes little sense when the large cost is small enough to pay from a drawer.

The numbers, and where to find yours

Folks sometimes ask me where the real figures hide. They hide in the paperwork, and in a few places you can check yourself. First, find the plan price and the length of coverage on the quote. Second, find the deductible, if there is one. Third, read the maker's own warranty, which is usually printed in the manual or posted on the maker's website. That free coverage often lasts a year, and the extended plan may overlap with it for the first stretch. If so, the buyer is paying for months already covered.

Next, find a fair repair cost. A local repair shop will quote you a typical price for a common failure, such as a compressor or a control board. Compare that to the plan price. Last, ask your credit card issuer whether it extends the maker's warranty at no charge. Some cards do. The terms live in the card's benefits guide, and the Consumer Financial Protection Bureau explains how to read card agreements. For the rules on how service contracts are described and sold, the Federal Trade Commission publishes consumer guidance on the subject. Where a state sets its own rules for these plans, the state insurance department or attorney general posts them. If a figure here is set by law, such as a cancellation refund rule, the current figure, which the official source publishes each year will show the verified number with its source and date.

A worked example

Let me tell you about a woman named Marlene, who is a school bus dispatcher and the sort of person who reads the whole receipt. She was buying a washing machine for $850. The store offered a four year plan for $140. Marlene sat down at her kitchen table and did the sums.

The maker already covered the machine for 1 year. So the plan really added 3 years of new coverage. She priced that at $140 divided by 3 years, which is about $46.67 a year. That is the yearly cost of the protection she did not already have.

Next, she called a repair shop. A common failure, a control board, would run about $320 with parts and labor. She also learned that her credit card added 1 year to the maker's coverage, which meant 2 free years in all. So the plan added only 2 new years. Now the math was $140 divided by 2 years, or $70 a year.

Then she asked herself a plain question. If the $320 repair did come, could she pay it? She had $2,000 saved for surprises. So she could. The plan was insurance against a cost she could already handle.

She weighed it this way. The plan cost $140. The one repair she feared cost $320. For the plan to break even, a covered repair would have to happen and cost more than $140. That was possible. But a repair costing $320 would save her $320 minus the $140 she paid, or $180. A machine that never broke would cost her the full $140 for nothing. Marlene chose to skip the plan and put $140 into her savings instead. She slept fine. Another person with an empty savings account might have chosen the other way, and that would have been a sensible choice too.

Where it goes wrong

I have made my share of foolish purchases, so I say this kindly. The first trouble is the pitch. A clerk may sell the plan right at the moment you are happy and ready to pay. That is a poor moment to decide. You are allowed to say you will think about it.

The second trouble is the fine print. A plan can sound broad and still leave out the exact failure that is most likely. Some require the owner to keep proof of upkeep. Some require repairs at approved shops only. Some pay in store credit, not cash. Read what is excluded before you read what is covered.

The third trouble is paying twice. A buyer can pay for coverage that the maker, the store, or a credit card already gives. Check before you buy.

The fourth is the company itself. A plan is only as good as the obligor behind it. If that company goes out of business, the promise may vanish with it. Look up who stands behind the contract. Then see whether your state regulates it.

The fifth is the claim process. Some buyers find that approvals are slow, or that the plan pays less than expected. That does not happen with every plan. But it is worth asking how claims are filed and how long they take.

One more thing. Do not feel foolish if you bought a plan and regret it. Plenty of careful people have. Most of us learn this lesson once, and then we keep it.

Questions to answer before you leave this page

What does the product cost to replace, and what would a likely repair cost? How long does the maker's own warranty run, and does your credit card add time to it? Could you pay for a repair out of savings without losing sleep, or would it throw your month into a spin? Who is the company that must pay the claim, and have you looked up its record? What does the contract exclude, and does the failure you worry about most land on that list? Is there a deductible, and does it change the math? Can you cancel and get money back, and what does your state require on that point? And finally, have you given yourself a day to think, so the decision is yours and not the clerk's?