Actualis



April 2010
Print Send to a friend

Is that extended warranty really necessary?

Once you realize that an extended warranty is actually an insurance product, it’s easier to make the decision.

We all do it. We spend months researching a product, hoping to save a few dollars, and then at the time of purchase, we don’t think twice about adding an extended warranty that ups the price by 30%.

We might behave differently if we were aware of the information in the following chart:


What can we conclude from these figures? That an extra 20-30% to cover a 3% risk seems particularly high. Would you pay a $60,000 premium to insure your $200,000 home for three years? Or $150,000 for a $500,000 life insurance policy that expires in 36 months?

An insurance policy like any other

Extended warranties are not necessarily the highway robbery some consumer groups claim they are. They can actually provide valuable protection for products more likely to break down. But the price should be appropriate.

The best way to determine this is to see extended warranties for what they really are: a type of insurance for managing a specific risk. Looked at this way, the ideal cost of an extended warranty would be the cost of replacing the product, multiplied by the probability that the product will become defective during the life of the warranty. For example, if the failure rate for a $300 Wii console is 2.7% over three years, the extended warranty should cost you… just over $8. The difference between that amount and what the store charges you (often more than $50) is the value you place on peace of mind or the time you would waste finding someone to repair the console inexpensively.

Removing emotion from the equation

One study cited recently in the New York Times shows that consumers are more likely to buy a warrantee when purchasing an item that gives them pleasure. People are actually happier to pay for a warranty on an iPod than on a washing machine, even though the washing machine is more likely to break down!

Here are some tips for removing emotion from the equation:

  • Be aware that the extended warranty is often the retailer’s most profitable product, with a profit margin of at least 50%.
  • According to Consumer Reports, the majority of products that break down do so within three weeks of purchase. In other words, if it’s still working after three weeks, it’s likely to keep working for the next three years.
  • Consumer Reports also says that, on average, a repair done under warranty rarely costs more than the warranty itself.
  • Check your credit card: some come with an automatic extended warranty if you use the card to buy the product.

Last, and most importantly, always examine an extended warranty as carefully as you would any other insurance product.

Source: New York Times.


Print Send to a friend