The Danger Of Extended Warranties

By: Stuart Laing
Submitted: 2007-01-17 16:21:08
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Consumer insurance, extended warranties. You know, these expensive insurance policies that they pressurize you into buying, just as you’re standing at the checkout before the transaction goes through.

Normally, if your new piece of household gadgetry breaks within 1 year, the manufacturer will repair or replace it free of charge. But if it breaks after 14 months, it's your problem. You have to pay for it to be fixed, or (more likely) pay for a new one.

So when you have the chance to extend the cover in return for a 'small' premium, the offer sounds rather tempting. I expect the retailer hopes that you’ll be so keen to get your latest purchase home, that you’ll just say yes and pile it onto your credit card.

And why do retailers sell these warranties? Is it out of the goodness of their hearts to prevent the poor customers being left with a two year old television that explodes and cannot be repaired? No, it’s because they make a damn good profit on the commission they get from the insurance company for selling these policies.

And that gives a clue regarding my next piece of advice. DON’T TOUCH THEM! AAAARRGGHHH! NEVER! DEATH TO EXTENDED WARRANTIES! They’re a blatant waste of money. The very fact that the retailer makes so much profit from these extended warranties means that they’re a waste of money for the consumer.

Buying a four year extended warranty can often add as much as 40% to the cost of the item. So a TV with a ticket price of $2000 could cost $2800 with a four year extended warranty. $800 extra!! And how often do electrical goods breakdown between the end of the manufacturers’ one year warranty and the end of a four year extended warranty?

Well certainly no more than 40% of the time. If they did, the cost of the cover would be even higher to allow the insurer and the retailer to make a profit. So here is what I suggest you do.

Refuse to pay the inflated price for any extended warranty and, if you’re the cautious type, save the money that the warranty would have cost you in a bank account. (The checkout assistant will even ‘tell’ you how much you need to put away to do this! Isn’t that nice of them?).

Then, if your purchase breaks down after the manufacturers’ guarantee is over, you’ll have the money (plus the interest that it has earned) ready to buy a replacement. But here’s the best bit….if nothing goes wrong with the equipment, your money will still be sitting in your bank account rather than the bank accounts of RIP OFF ELECTRONICS PLC and THE EXTORTIONATE INSURANCE CO. You could even use it to help with the cost of replacing the item when it reaches the end of its natural lifespan. How many extended warranties will allow you to do that?

Brilliant!

Still not sure? Well let me put it this way. An extended warranty is just an insurance policy, and insurance is just money paid to cover the potential risk of a certain event happening (i.e. your shiny new super-duper TV exploding within years one to five of your ownership). So, to set the premium, the insurance company uses their experience to decide upon the chances of your new purchase breaking down or being damaged within the time of the extended warranty. The higher the risk, the higher the premium they will charge.

Still following? Good.

But then they need to make some profit, so they charge a premium that reflects a higher risk of these insured events occurring. In effect, you’re paying to cover the actual statistical risk of these events happening, PLUS the insurance companies’ profit on the policy.

By keeping your own money, you can cover your own potential loss AND avoid having to inflate the profits of some vast insurance company. Obviously there are potential problems with this tactic. You could be incredibly unlucky and end up in a situation where every piece of electrical equipment you buy blows up or is irreparably damaged one year and one day after you bought it (in which case you’d only have around 40% of the cost of a replacement). But how likely is that to happen?

But the more household goods that you protect in this way the safer you’ll be, because the working lifespan of the different items will average themselves out over time. Some items may last 15 years, while others may only last three.

by Stuart Laing

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