Is Buying an Extended Warranty Ever a Good Idea?

waderoush writes "Consumer Reports calls extended warranties 'money down the drain,' and as a tech journalist and owner of myriad gadgets — none of which have ever conked out or cracked up during the original warranty period — that was always my attitude too. But when I met recently with Steve Abernethy, CEO of San Francisco-based warranty provider SquareTrade, I tried to keep an open mind, and I came away thinking that the industry might be changing. In a nutshell, Abernethy says he's aware of the extended-warranty industry's dreadful reputation, but he says SquareTrade is working to salvage it through a combination of lower prices, broader coverage, and better service. On top of that, he made some persuasive points – which don't seem to figure into Consumer Reports' argument – about the way the 'risk vs. severity' math has changed since the beginning of the smartphone and tablet era. One-third of smartphone owners will lose their devices to drops or spills within the first three years of purchase, the company's data shows. If you belong to certain categories — like people in big households, or motorcycle owners, or homeowners with hardwood floors — your risk is even higher. So, in the end, the decision about buying an extended warranty boils down to whether you think you can defy the odds, and whether you can afford to buy a new device at full price if you're one of the unlucky ones."

Comments

Warranty or insurance?

[fruitbane]

This is a problematic piece because it confuses an extended warranty and accident protection/insurance. Most extended warranties do not include accident protection, and that option tends to cost extra and require the base extended warranty, which is the problematic part. If FourSquare wants to offer cheaper, better extended warranties paired with accident protection, more power to them, but that's a very different thing than an extended warranty alone.

Re:Warranty or insurance?

[stephanruby]

This is a problematic piece because it's form of advertisement thinly veiled as a Slashdot article.

$125 a year (or more if I pay on a monthly basis) to replace my smartphone in case of an accident. Are they kidding me! The last problem I had with my Evo, Sprint replaced the screen free of charge (they didn't even charge me the $40 I had agreed to paid when I dropped it off). Please note, this is not an advertisement for Sprint (even if Sprint's customer service is fine, their 4G coverage is seriously getting degraded in areas where it used to be fine before).

I think everybody would be better off if they just set aside $125 a year in a piggy bank every time they buy a new device (whether it's a smartphone, a laptop, a TV, or whatever). It all adds up. If something ever goes wrong, they can just break the piggy bank. At least, after everything is repaired and the bills are settled, they'll have a few thousand dollars left over that they wouldn't have had otherwise.

Re:Warranty or insurance?

[PRMan]

It absolutely might. My wife being a realtor, we've had home warranties over the years and they almost always pay off. Older homes develop issues and we get more than we pay out over the year. (I assume most people with them forget they have them and call the plumber or electrician or HVAC guy or garage door guy themselves.

Re:Warranty or insurance?

[Anonymous Coward]

It makes far more sense to put your own money in the bank to insure your items than to pay someone else to do it. Here's why:

1. You will be earning interest on the money.
2. You decide whether an item merits repair or replacement.
3. You still have the money.

Consider a scenario where your cell screen shatters.

If you are insuring your own device, you have a choice to repair the item or use it as is (assuming it is otherwise functional). You might elect to save the money and just wait a few months for the next iteration of phone. In this case, the money you are using to insure the phone can insure the next one too. Or you might choose to repair the item now. It's your choice. And you're earning interest on your insurance money in the meantime.

If you pay someone else to insure your device, you've already spent the money. Get the item repaired. And hope they don't deny your claim. In either case, you're going to be shelling out to insure your next phone. And they're earning interest on that money.

The *only* reason to get the extended warranty and/or accident replacement is if you have reason to believe you will come out ahead. For most people, this isn't the case.

My method is to put the price of the warranty into a savings account. Do this enough times and you end up with a sizable "warranty" account. After the account reaches $1500, I take $1000 of it and put it in a CD. I personally let the interest ride, but you could take it out and put it in your spending account.

Re:Warranty or insurance?

[Jah-Wren Ryel]

It absolutely might. My wife being a realtor, we've had home warranties over the years and they almost always pay off

If that were true. the companies selling those home warranties would be bankrupt. It is mathematically impossible for almost all customers to get more money out of their home warranties than they put.

Re:Warranty or insurance?

[Anonymous Coward]

I am not at all surprised by his anecdote and I think it is true. I know many people with home warranties. Most people I know have abysmal stories and treatment. However, the one person I know who gets good treatment is my cousin who is a real estate agent and his family. Perfect illustration, his parents were having a hard time trying to get something covered with the company fighting them all the way, they complain to their son, who calls the company on their behalf and BAM, someone is there the next day fixing it and they waive the fee. That makes full sense too. After all, it is the real estate agent's job to sell those to their clients. Heck, every time my wife and I looked at a home, our agent tried to sell them. They ethically couldn't sell them, unless they actually thought they were in the client's best interests.

Re:Warranty or insurance?

[FatdogHaiku]

I have a buddy who called Sears to look at a noisy refrigerator. As the service tech is evaluating the fridge, he notes there is also a Sears (Kenmore) washer and drier. When he comments on this my buddy tells him that they also have a Sears TV. The tech estimates about $700 to replace the compressor in the fridge (yes it was a nice, big unit). and my buddy tells them to order the part. Next day my buddy gets a call from Sears wanting to know if he would like a warranty plan for all his Sears stuff. He tells them to let him talk to his wife and would they please call back in an hour. He then gets the service tech on the phone and asks him to stop the order on the repair of the fridge, as the noise has stopped. When the warranty sales person calls back he asks if the plan is effective immediately and is told yes. He gets warranties on everything, giving serial numbers and what not. Two days later he calls to say the fridge is making funny noises. The same tech comes out and starts the part order under warranty. My buddy asks if he can also look at the TV, which "suddenly stopped working", not mentioning it "suddenly stopped" a month ago... during lightning that killed a surge protector and a DirectTV box.

The fridge was the fixed the next week. The TV was determined to be a total loss after having it in the shop for a month (not big TV people here) and a credit for $500 was issued for a new Sears TV. My buddy was out less than $300.

Sometimes the extended warranty sales scam backfires.

Re:Warranty or insurance?

[Lloyd_Bryant]

It absolutely might. My wife being a realtor, we've had home warranties over the years and they almost always pay off

If that were true. the companies selling those home warranties would be bankrupt. It is mathematically impossible for almost all customers to get more money out of their home warranties than they put.

Not entirely true. You aren't factoring in the negotiating power that those insurance companies have with the contractors providing the service. While you may pay $500 for a given repair, the insurance company may, through a negotiated discount, be only paying $300. So there exists a range where both you *and* the insurance company benefit from the deal.

The *contractor* for the work may be one who is losing out, though not necessarily - if the contract allows the contractor to fill 75% of his available time with paying work instead of 50%, the lower rate may still result in a net gain for him.

Re:Warranty or insurance?

[davester666]

I can't tell, are you happy or angry or sad that your friend blatantly defrauded Sears?

You don't mind paying a little bit extra for everything at Sears to help him get a new TV and Fridge?

Or are you more of a "just look out for number one" person [no, I'm not talking about making sure someone isn't pee'ing off the balcony as you walk underneath it]? That it's up to Sears to make sure it's not defrauded, and if you can rip anybody off, you should.

Re:Warranty or insurance?

[davester666]

Yes he did lie, twice.

1, when he cancelled the repair, claiming the fridge was working properly
2. when he signed up for the warranty, and claimed that the TV was working properly

Saying it's ok to defraud Sears, because Sears knows some people will defraud it, and so they raise the price to cover this fraud, is, well, childishly stupid and still wrong.

no hardwood here

[Libertarian001]

I don't have hardwood floors. I have tile. I'm safe.

Re:no hardwood here

[Roger W Moore]

Interested in an extended warranty on your tiles to cover cracking due to accidentally dropping your smart phone on them?

Warranty vs Insurance

[Dan East]

It sounds like the summary is mixing and matching two different things, which are insurance and warranty. Generally warranties don't cover "drops or spills". Insurance is usually better, because once you're done with the device, you stop paying the insurance on it. With extended warranty, you have to pay up-front for the service, with the obvious assumption that you're going to own and use the device (and not lose it, upgrade to something else, sell it, give it away, or have it stolen) for at least a certain amount of time to make it pay off.

Here's the deal...

[msauve]

When they sell you an extended warranty, they're doing it to make money. They have a much broader base to analyze, and they're very good at calculating how much to charge vs. how much they'll have to pay out, to end up with a profit.

It's the same with all insurance. However, unlike life, or health, or car insurance, where there's a low, but finite risk of being out a huge amount without insurance, with product warranties you're out no more that what you've already paid.

So, long term, no, they're not a good deal. Put the same money in the bank and you'll be ahead on average. Sure, there's risk you can still end up worse off, but not catastrophically.

Re:Here's the deal...

[stanjo74]

Exactly this. For non-catastrophic things, be self-insured. If you can afford to pay for a replacement, pay yourself the insurance premium. The insurance company has already done the work for you to analyze the risk and come up with an insurance premium number.

Re:Here's the deal...

[Darinbob]

My rule of thumb is that the harder the sales pitch is the more likely it's not a good idea to buy.

Re:Here's the deal...

[Intropy]

The information is asymmetric both ways when accidental damage is covered. They are going to charge enough to make a profit overall. That is true. But if you know you are accident prone, or have kids that break everything, or something to that effect that is covered, and the warranty company does not know that, you can still have an expected positive return.

Re:Here's the deal...

[EvanED]

The variance is higher, sure, but over time you'll make out (at least if you fit the insurer's risk model well enough). You don't get to average over lots of different people, but you at least get to average over different devices. If this year you buy a laptop and next year you buy a phone and a tablet and the year after you get a Kindle, you'll probably do OK over the life of those four products.

Insurance is all about expectation vs variance. (Well, and how much you think you line up to the risk model.) You said "the math only works in large enough numbers for the statistics to average out", but that's only true in a sense: larger numbers won't change the expectation, just the variance. For something like health insurance, where if you need $500,000 of surgery there's almost certainly no way you can afford it, the variance wins out and you should get insurance. For something like a $500 phone, for a lot of people probably the expectation wins out.

The idea which I replied to and thought was clever was not really addressing whether insurance makes sense or not in my mind. It was more like if you already decided that you want to side with the expectation and not buy insurance, you could set aside that dedicated "account" for replacements and the amount to put into it is prefigured.

Depends on who you get it from

[Voyager529]

Best Buy and HP are on my I'll-take-my-chances list. When I've bought warranties from either, they've failed to honor them in more cases than not. HP spare parts are also sufficiently plentiful on eBay and I've gotten to the point where it's worth my time to just swap the parts out myself when something goes wrong. Admittedly this is atypical for the average consumer (especially when it comes to iPads and similar), but it's true at least for me.

Cell Phones? Asurion. Always. I've never once had an issue with them; I pay my deductible and I've got a phone on my desk at work the next day, every time. THEY are worth it. Yes I know that this is insurance, not a warranty per say, but ultimately it boils down to semantics insofaras Asurion gets paid monthly through my cell carrier while an extended warranty is a one-time payout.

Origin PC is another company whose warranties are worth it. Perfect support, perfect track record with replacement parts, and they've worked with me every time, without exception. I'll by warranties from them any day.

Tablets? Well, mine is a Toshiba, a company who's also been historically atrocious with warranty related matters in my experience, plus the tablet itself is sluggish and moderate-at-best quality so the device itself doesn't justify it for me personally.

This does raise a tangentially interesting business question though: we all know that businesses make a mint off the warranties and thus push them in order to bump the profit margin on the sale. I get that, and I'm okay with it. The problem then becomes the fact that it gives incentive for device prices to remain artificially high. If the device is higher priced, companies make more money. It justifies warranty purchases (also at higher prices) in many minds due to how expensive the device is. Now in the case of Apple specifically I'll give them a certain level of a pass on this because they are well known for honoring their warranties very consistently. Everyone else...not so much.

Thus, My original premise stands: certain companies make it worth it because there's actual peace-of-mind involved. I don't worry about my laptop breaking; I know Origin has my back without question. I don't worry about my screen cracking, Asurion will see to it that I can make calls tomorrow by noon. My Toshiba tablet? I have peace of mind knowing I'm screwed if the tablet breaks, as opposed to knowing I'm screwed if the tablet breaks AND I have a hundred bucks in Toshiba's hands whose only redeeming factor is having some underpaid foreign support representative informing me I'm screwed and my warranty doesn't cover whatever-happened-to-my-tablet.

Re:No.

[green1]

Did you ever take them up on it? because I can tell you from my experiences with future shop (same company as best buy) that their extended warranty wasn't worth the paper it was written on. I had a camera die on me within the extended warranty period. no physical damage at all, not caused by a drop or anything else, it simply decided to throw an error message one day and wouldn't boot. When I took the camera back in to the store they told me they'd have to send it away and would let me know in a couple of weeks if it was eligible for the warranty. A few weeks later I was told my warranty claim had been denied due to "abuse". After escalating it through several levels of management and refusing to leave the store until it was addressed, they agreed to replace the camera, but not with an equivalent model, but only with the cheapest piece of garbage they had on their shelf at the time. In the end I managed to get half the cost of an equivalent camera to the one that had broken under warranty. And they had the audacity to try to sell me another extended warranty on the new camera!

And that was one of my better extended warranty experiences, I had one on a used car that was denied due to "pre-existing conditions" (I thought that's exactly what warranties were supposed to cover!) I never did get anywhere on that one. I tried to take my roofer up on his installation warranty after discovering that he had caused a leak in the roof, only to find out that he was out of business, and his parent company told me the warranty was only with the individual roofer, not the company...

I will NEVER under any circumstances pay an extra cent to buy an extended warranty on any product. They are fraud, plain and simple.

An extended warranty is a kind of insurance

[Sycraft-fu]

It is a transfer of risk: You pay a company to assume the risk of a device failing during normal operation. As with any insurance, it is limited in what it covers, and it is more limited than an accidental damage plan.

As to if they are worth it, well it all depends on your situation. Largely it is if you can afford to replace the device in the event it fails. Insurance is rarely "worth it" in the overall sense. I mean obviously insurance companies have to take in more money, on average, they they pay out or they won't exist. So it comes down to the individual loss: You insure things you can't afford to pay for.

So in terms of an extended warranty, well if accidental damage is you concern then you'll need something additional. It would be for a case where you have an expensive device that you really can't afford to replace, and do not wish to do without.

Re:An extended warranty is a kind of insurance

[Technician]

The biggest deal at the moment is the falling prices for older technology.

Case in point, my 32 inch (yes only 32 inch) flatscreen tv was $800 when I bought it. 6 months later in warranty the sound failed. I took it back to Costco for repair. They didn't repair them, they refund them in the warranty period. Got the refund and picked up another one, same model, on sale for $600. If I would have bought an extended warranty and it failed just outside the manufacture warranty period, I could have gotten a repair on that $600 TV, but now the prices on 32 inch TV's have continued to fall. I took my gamble and didn't buy an extended warranty. If the set dies, a replacement is only slightly more than the extended warranty would have cost.

In summary. If I don't use the warranty, it costs nothing. If I did buy the warranty, I would have almost paid for a new LED version of my TV with a new warranty for the privilage of having my old CFL tv repaired.

Frankly I am glad I saved the money. The newer TV's have higher resolution and higher contrast, brighter color, etc than a repaired tv for about the same price would have provided.

LED 32 inch TV's are about $250 now.

Insurance

[frisket]

They're not warranties. They don't warrant anything at all. They're just insurance. Once you get that clear, it's a straight choice on the basis of cost vs benefit. A real warranty penalises the manufacturer for shoddy goods or inadequate service by making them make good the deficit. That is not the case here.

Re:No.

[existentialism0]

I used it for my Xbox 360 twice. And on the second occasion I received a gift card for the difference of the original purchase. Best part was, new xbox and controller both times, WITH upgraded HDD's and whatever pack-ins were included at the time. I walked in, grabbed a new xbox, and took it to the exchange counter along with my old one. It was pretty hassle-free, aside from the ridiculously stupid wait times. They need to staff customer service better. Of course, I bought my Xbox going in knowing that it was likely to break, so it wasn't a big gamble to buy the extended warranty. And I imagine they were so used to seeing this by that point that they didn't bother to try and debate with someone bringing in a broken Xbox. That said, my brother had a similar experience with his original xbox and best buy as well. We've also gotten an enormous amount of use out of several other Warranties from retailers for various appliances.

Re: Not if it is for a computer

[sortius_nod]

The OP has it wrong. Extended warranties last 3 years, during the lowest chance of failure time, electronic devices will generally die in the first few months (manufacturer warranty) or after 3 years (after extended warranty). Add to this that extended warranties have convoluted terms that attempt to stop people getting warranty repairs.

In Australia, extended warranties are useless due to Australian Consumer Law, which protects consumers by making manufacturers repair goods if they fail before a reasonable time. Essentially, if there's an extended warranty available, the item should last as long a the extended warranty.

Re:hard drives

[kaatochacha]

Do you use them for hammers?

Re: Not if it is for a computer

[SteveTheNewbie]

Then lodge a complaint with the ACCC, you may be surprised at the response. (Also helps to send a copy of the complaint to the manufacturer)

You may also get more joy dealing with your reseller as well - as the sales contract is with them, and they should be the ones making it right, and then it will be up to them to claim back from the manufacturer.

http://www.consumerlaw.gov.au/content/the_acl/downloads/consumer_guarantees_guide.pdf has more information and is a very easy to read guide

http://www.consumerlaw.gov.au/content/Content.aspx?doc=consumers_ACL.htm has contact information and advice on where to file a complaint

I've found printing out the guide and taking the relevant section in with you when you visit a retailer has worked every time. It got my fridge fixed out of warranty, and my PS3 replaced when the DVD drive died about 2 weeks after the warranty expired.

Re:Not if it is for a computer

[Seumas]

It really depends on the company and the product in question. It'd be pointless to buy an extended warranty on a $130 printer at Staples, but it'd be a very good idea to get the AppleCare for most Apple products, since they are extremely good about dealing with problems (my laptop developed a severe series of blemishes where the coating on the unibody just completely wore away after the initial coverage, but within the Apple Care coverage -- I sent them photos and had me stop in at the nearest Apple Store for a brand new replacement with absolutely no hassle).

I'd also get an extended warranty for an expensive television. Maybe not the warranty the store is trying to sell you, but you can do your research and find various extended warranty companies (I've found SquareTrade to be fine enough). If you spend $4,000 on a real project display and you can get a three year extended warranty for $200 which includes a free bulb replacement (easily $130+), then that's a pretty good deal.

Most recently, I bought a $400 XBox 360 that developed an issue with reading discs about 80% of the time and made a concerning grinding noise as it spun the disc, trying to read them. Because Microsoft's warranties are so stupidly fucking short, I had to rely on my SquareTrade warranty (which I think was $30 or so?). I filed a claim online, they sent me a customized box and packing materials just for the console and I had it shipped, fixed, and returned to my home in about ten days. That was well fucking worth the $30.

I would generally say "extended warranties are a scam", but as with many things, there are exceptions and you have to know when and where those are. A good rule of thumb is probably to just never buy the extended warranty they're pushing on you at the showroom for *anything*. Period. That's just an upsell to pad their pockets and nothing more. Probably also don't bother getting a warranty on fairly cheap things - the exception being something like an XBox 360 which is not *almost* cheap, but also known to have serious failure rates. I saw it as an investment with an absolute eventual return - and it paid off.