Does it make sense to buy extended product warranties?

A customer considering an extended warranty, just moments before the doubt-spiral set in. See more HDTV pictures.
Spencer Platt/­Getty Images

It's become an indelible part of the ritual of purchasing electronics and other expensive items, and it usually comes at the end: the pitch -- and the pressure -- to purchase a product's extended warranty. A less-than-resolute shopper can be stuck in his or her tracks, panicked with indecision. What if the TV or the iPod or the stove you've just purchased actually breaks? Does it make more sense to replace it? Is it a good idea to buy insurance -- and peace of mind -- in case it goes haywire?

It makes sense: If you've just bought an expensive item, why not buy some additional insurance for it? However, some factors can make extended warranties at best a bad idea and at worst, a downright rip-off. Consider the length of time that they cover. Most items have a manufacturer's warranty that covers malfunctions and product flaws. These usually last for one year. An extended warranty can last a few years, but it begins when you purchase the item. So a three-year extended warranty really lasts just two years, since the first year is concurrent with the free manufacturer's warranty that came with the item.

­B­ased on the law of averages, it makes more sense to turn down extended warranty offers. Statistically speaking, a product is likeliest to break either early on, within the free manufacturer's warranty, or years down the road, after an extended warranty has expired [source: Grant]. Looking at the profitability of extended warranties among consumer electronics retailers provides some insight as well. Retailers make as much as 40 to 80 percent profit from warranties [source: Bradford]. The reason they're so profitable is because the cost-conscious consumer always bets that his or her purchase will break. The consumer, unfortunately, rarely wins that bet. In other words, when it comes to extended warranties, the deck is stacked decidedly in the retailer's favor.

An extended warranty, like any type of insurance, is a form of gambling. But is it always a bad bet?

 

Extended Warranty Pros

If these Buddhist monks are absent minded, they may want to go for the warranty for whichever phone they purchase.
If these Buddhist monks are absent minded, they may want to go for the warranty for whichever phone they purchase.
Mike Clarke/AFP/Getty Images

­D­on't get us wrong; there are many situations where it's a good idea to shell out extra money for an extended warranty. Remember, though, that it won't will truly come in handy if you haven't done your homework before you buy.

Chief among these situations is when you purchase an expensive item. If you plan on spending several thousand dollars on one thing, it may be worth the extra few hundred dollars to make sure you're covered a little longer in case your purchase goes pear-shaped. The more expensive an item, usually the more expensive it is to fix, so it may make sense to invest in an extended warranty for big-ticket purchases.

Reading reviews of the item you want to buy can also lead you to a sound conclusion on an extended warranty for it. If you notice the product has a reputation for breaking easily, but you're bent on buying it no matter what, an extended warranty makes sense. It makes even more sense if the item is a durable one that should last for several years, like a PC. In fact, personal computers are one of the likeliest big-ticket items to go on the fritz, with a 37 percent chance of needing repair within three years following purchase [source: Bradford]. Extended warranties for PCs also generally come with tech support, which can be costly without a warranty.

Another good bet for an extended warranty is one that covers a rear projection TV. The bulbs in these televisions are supposed to last about 5,000 hours. If you're an average American, you'll likely watch enough television to burn out its bulb within the life of the extended warranty [source: Grant].

You should also do a little self-reflection when considering an extended warranty purchase. If you conclude that you're an absent-minded, clumsy oaf, it might be in your best interest to spring for one. With that said, you must make sure you know what you're paying for ahead of time. While some extended warranties cover repairs or replacements for accidental damage, loss or theft, not all do. Purchasing extra coverage for a new cell phone is usually a good bet, since cell phones are small and easily misplaced (be sure you read the warranty, since water damage usually isn't covered). Extended warranties for cell phones are designed for lost or accidentally damaged phones. Usually they come with a monthly fee of a few dollars tacked onto your phone bill and you'll pay a deductible. However, the combined monthly cost and the deductible is usually less than what you'd pay to replace a phone out of pocket.

The same goes for an item you plan to use extensively. In November 2008, NPR reported on David Axelrod, chief strategist for Barack Obama's successful presidential bid. Describing Axelrod's work ethic, reporter David Schaper said, "David Axelrod is the kind of guy who wears out Blackberries. Wears them out or breaks them" [source: NPR]. Because of the endless texting and e-mailing that someone with a job that requires constant communication would expect to undertake with a BlackBerry, it would be wise to purchase an extended warranty.

If you opt for an extended warranty, purchase it directly from the manufacturer, if at all possible. It's generally much cheaper than one purchased from a retailer.

More often than not, though, paying extra for an extended warranty is a bad bet. See why on the following page.

Extended Warranty Cons

Should President Gerald Ford have sprung for the extended warranty for his toaster? Probably not; he could likely afford to simply replace it.
Should President Gerald Ford have sprung for the extended warranty for his toaster? Probably not; he could likely afford to simply replace it.
Dirck Halstead/Time Life Pictures/Getty Images

­So you're already aware of two reasons why extended warranties are generally a bad idea -- they're profitable, which means they usually go unused, and they actually expire a year sooner than advertised. There are plenty of other perfectly good reasons to opt out of an extended warranty as well.

You may not be aware of it, but many credit card companies automatically give you an extended warranty on an item you purchase using their cards. All American Express cards offer warranties, and higher-end cards from Visa and MasterCard do the same. Usually you'll have to submit your receipt and the expired manufacturer's warranty to qualify for a repair or replacement, but why purchase an extended warranty from the manufacturer or retailer when your credit card company already has you covered?

There's also the consideration of cost. Can you believe that some extended warranties are actually more expensive than the item they cover? If the warranty is less expensive than the product it's attached to, you should probably consider simply replacing the item. Warranties often require you to mail the defective product to the manufacturer -- and you may have to pay for shipping both ways -- which means you'll wait awhile before you see your repaired or replaced possession. If the price is low enough that you can swallow purchasing a replacement, you'll have it immediately. (Of course, you'll want to recycle the older item instead of simply tossing it, and you may want to consider finding another brand).

The quality of many goods leads us to another reason to skip an extended warranty: Many products are made so well that they usually don't break for a while. While a PC has a 37 percent chance of breaking within three years, other products, like rider lawn mowers and refrigerators, are less likely to conk out in the same period. If you've done your homework on a product you're interested in, you may find that it's a durable one. If the product probably won't break within the time frame covered by the extended warranty, purchasing one is a bad bet.

Ultimately, the numbers spell out why extended warranties are usually a losing proposition. On average, for every $100 spent on an extended warranty -- which, in 2004 totaled $15 billion in the United States -- only $20 ends up being spent on repairs or replacements for defective items. The other $80 ends up in the warranty issuer's pocket [source: Armstrong]. Ultimately, it's in the best interest of the manufacturer to produce a durable product that won't require repair or replacement -- and hope you'll purchase an extended warranty in case it does.

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Sources

  • Armstrong, Larry. "When service contracts make sense." BusinessWeek. December 20, 2004. http://www.businessweek.com/magazine/content/04_51/b3913113_mz020.htm
  • Bradford, Stacy L. "Extended warranty rip-offs." SmartMoney. December 5, 2007. http://www.smartmoney.com/spending/deals/extended-warranty-rip-offs-17820/#
  • Grant, Kelli B. "When buying a warranty makes sense." SmartMoney. December 5, 2007. http://www.smartmoney.com/spending/deals/when-buying-a-warranty-makes-sense-22229/
  • Merritt, Tom. "Should you pay for an extended warranty?" CNet. December 2, 2005. http://reviews.cnet.com/4520-3000_7-6398085-1.html
  • Schaper, David. "Strategist Axelrod will advise White House." NPR. November 20, 2008. http://www.npr.org/templates/story/story.php?storyId=97241715
  • "Warranty rights FAQ." Nolo. Accessed November 20, 2008. http://www.nolo.com/article.cfm/pg/3/objectId/99FA12AD-B11E-4AD5-B08F0009724D1BB4/catId/498F840B-0B7B-4A9A-AE102EC156E16660/104/284/164/FAQ/