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Are Extended Warranties Worth the Extra Money?

The late comedian, John Pinette, had a routine about buying a $2,000 TV and being asked if he’d also like an extended warranty. The exchange went like this:
“What do I need an extended warranty for?”
“Well, in case the TV breaks.”
“If the TV’s gonna break, I’m not buying it!”
According to Pinette, the salesman’s eyes went dead: “Nobody had ever said that to him before. Nobody ever questions them! We just sign on the dotted line, and it’s wrong! And I was gonna stick up for all of us!”
The routine comes with an important message: Don’t sign up for extended warranties, just because some extra protection sounds good. You have to find out if the deal makes sense.

What Is an Extended Warranty?

Extended warranties are insurance policies that extend or supplement the manufacturer’s warranty that comes with a product. Sometimes the coverage comes from the manufacturer directly, sometimes companies outsource the coverage to a company that administers warranty programs. In other instances, retailers offer their own extended warranties. Whether it’s called “extended warranty,” “maintenance agreement,” “service contract” or some clever name that makes it sound like a special type of product insurance, you’re basically purchasing some level of repair and/or replacement coverage.

Is an Extended Warranty Worth It?

If you’ve ever had someone try to steer you eagerly toward an extended warranty, you know just how popular those agreements are with retailers. Perhaps you’ve even had your own “John Pinette moment.” But outside the circle of retail outlets and sales associates, extended warranties don’t have a huge fan base.
That doesn’t mean an extended warranty is always a bad idea. If you’re nervous about an expensive purchase and the coverage isn’t too hard on the wallet, you may want to go ahead and sign up just to give yourself peace of mind. Parting with a little money for a warranty may feel better than walking on eggshells every time you use you the item in question.
One way to make the cost of an extended warranty less of a burden is to get the lowest possible price on an item in the first place. Once you have an extended warranty, revisit the decision every once and a while and decide if you really still need it (consider it along with your annual New Year’s resolutions).

When Is an Extended Warranty a Good Idea?

The extended warranty decision should be based on some very simple and straightforward questions. The U.S. Federal Trade Commission (FTC) lists a few:
Is the Product Likely to Need Repairs?
This is all about being a careful shopper. Research products thoroughly before you buy. Read reviews. Find out what experiences other people have had. If you suspect the product you have your eye on may end up needing repairs, check out other manufacturers of similar products. If you find yourself faced with a product you absolutely need but that may reasonably need servicing once the manufacturer’s warranty expires, perhaps the extended warranty is the way to go. But before you sign, make sure the potential cost of repairs isn’t lower than the price of the warranty.
Does the Service Contract Really Provide Extra Coverage?
Make sure you understand clearly what the original manufacturer’s warranty covers and how it compares to the extended agreement. Does the agreement actually extend the warranty or does it provide a different level of coverage? As much as we all hate to read fine print, understanding extended service agreements is key to knowing whether or not they’re worth the expense. You don’t want to find out later that the one type of repair or malfunction that was a concern for you isn’t covered.

How Are Claims Handled?
Ask detailed questions about what happens if you need to make a claim. If making use of the extended coverage sounds like jumping through a series of hoops, you may want to reconsider the thought of signing up. Do you contact the retailer? Is the repair service under contract with the retailer? Do you need to bring small items into the store or ship them somewhere for repairs? Is service only available locally? What if you move while the extended warranty is still in effect?
Who Is Responsible for the Contract? Make sure you know who you’re making your service agreement with. Remember because you sign up at a particular store doesn’t mean the store is responsible. Ask the name of the company responsible for seeing to it that your service contract is acted upon and then research the reliability of that company.

Are There any Alternatives to Extended Warranties?

Consider taking the amount you may spend on an extended warranty and setting it aside as an emergency fund for repairs. Sure, remembering to put money aside can be difficult. But, if you do, and the product never needs a repair, you’ll find yourself with some extra cash.

What About Extended Warranties on Vehicles?

Since many of us tend to drive our cars well past the warranty from the manufacturer or dealership, extended warranties in the automotive realm aren’t as cautionary a tale as in the electronics/appliance world. But you still need to be a careful shopper. While an extended automotive warranty might be a more practical decision than coverage for household items, the decision is still a question and answer process. Even the timing of your extended warranty purchase is something to consider.
So … are extended warranties a good idea? Maybe. But there’s no substitute for smart shopping and careful decision making to help you keep a hold of your money.
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