Extending the Door to Extended Warranties

extended-warrantiesWhen your car, computer, or a major system in your home runs into trouble it can be comforting to believe you won’t have to dig deeply into your wallet to take care of the repair. You have bought an extended warranty for that fix from one of the many companies that sell them.

These protection plans are also called service contracts or protection policies. But whatever name is used, many experts urge you to avoid them.

Extended warranties can be sold to you by a salesman in a seemingly soup to nuts manner, with the idea that everything listed is covered. But there is fine print in the contract about things like maintenance that can put the kibosh on the fix. In fact, these warranties have become one of the major complaints the Better Business Bureau receives.

What’s covered?
The Federal Trade Commission (FTC) is the agency responsible for enforcing violations of warranty laws. “Accidental damage may not be covered. And there may be clauses that allow the company to deny coverage if, for example, you don’t follow their instructions for routine upkeep,” the FTC says.

Can you demonstrate that the troublesome part wasn’t already broken when you signed up—a so-called preexisting condition? Was the problem caused by a manufacturing defect or by an accumulation of sentiments, rust, mildew or mold? Is it a cosmetic issue that doesn’t affect an item’s performance? All of these can be reasons why a provider will reject your claim, the FTC noted.

Extended warranties also can exclude certain parts. For example, refrigerator components not covered under one home service contract Consumer Reports reviewed include: icemakers, beverage dispensers, door seals and gaskets, hinges, lighting and handles. An auto service contract the consumer watchdog publication examined excludes brake drums and rotors, air bags, door handles, lock cylinders, the exhaust system, and body panels, among other parts.

Some extended warranties simply duplicate the express warranty coverage you have with the manufacturer, which you’re required to use first.

An expensive proposition
A recent Consumer Reports survey found that 55 percent of owners who purchased an extended warranty hadn’t used it for repairs during the lifetime of the policy, even though the median price paid for the coverage was roughly $1,200.

On average, those who did use it spent hundreds more for the coverage than they saved in repair costs. Those initial costs and deductibles, along with the fee some plans charge every time you make a claim, do add up.

If the plan allows you to use your own repair shop, as with many auto extended warranties, the shop typically has to obtain approval from the provider before beginning work, a big hassle that some shops might consider too much trouble.

The FTC also warns warranty providers can go out of business, leaving customers without the coverage they paid for. That’s a particular issue with third-party extended warranties, as opposed to those provided by product manufacturers.

It often does not make sense
“From economic and risk standpoints, it usually doesn’t make sense to buy an extended warranty,” said Rajiv Sinha, a marketing professor at the W.P. Carey School of Business at Arizona State University.

In fact, retailers typically enjoy a greater gross profit on the extended warranty than they do on the product they’re selling.

Standard warranties should be enough to get you by, Sinha said.

Peace of mind is a possibility
It makes sense to pay $100 to $400 or so for an extended warranty if more is being offered and you are satisfied with the fine print. For example, a new HVAC system costs thousands of dollars, and a warranty company that is on the up-and-up would honor its commitment to replace the unit. The cost to you—a few hundred dollars (what you spent on the home warranty and a service cost).

You might also want peace of mind for your new car, PC or smartphone. But buyer beware. Make sure you shop widely for a warranty company—even check with the Better Business Bureau—and examine each company’s warranty policies in advance.

Resources: Better Business Bureau, Consumer Reports, Federal Trade Commission