Thanks to NGPF Fellow, Brian Johnson for this recent post on this fundamental question about a popular form of insurance: 

This story actually begins in 2000 when flat screen TVs were starting to replace the big tube TVs.  In purchasing my first flat screen TV I did the unthinkable…I bought an extended warranty plan!  What I received was an education and confidence that would save me money in the future.

Sure enough, that TV went out with about two months left on the warranty.  The store I bought the TV from sent out an in-home technician.  I was able to watch him complete the repair of a burnt out capacitor.  I asked him how much this visit would have cost me if I didn’t have the extended warranty.  He informed me, “The visit is $200 and the part is $4.99.” That same TV went out again two years later.  I fixed it myself with a $5 capacitor.  Savings: $200!  Another two years and it went out again for another $5 capacitor.  Savings: $200!

Now whenever anything goes out, I first think fix-it!  Especially with so many people putting out "how to videos" on the internet.  Since fixing the TV, I’ve extended the life of my dryer by fixing it myself for a $20 part.  The big savings came recently with the family car when the Check Engine Light came on.  A local auto store advertised that they would diagnose the problem for free and 30 seconds later I had the cause and part.  An hour later it was fixed! I recently read an article on-line that that advised:

“In most cases, it's best to purchase another one. With technology changing rapidly and the costs of repairing a flat screen TV likely costing you close to or more than the price of a new one, it's a no brainer.” 

RED FLAGS went up! That’s not true!  If I had followed this advice instead of saving myself $400 by fixing this TV I would have spent money on a new TV twice! Always utilize the manufacturer for repairs if your product is in the warranty period. You don’t want to do anything to jeopardize this protection.  But once the warranty is over, have courage and look to save!

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As for me (Tim speaking here), my philosophy has always been to never ever ever buy the extended warranty (I am also not a Mr. Fix-it like Mr. Johnson either! I had an experience decades ago that left quite an impression. As an investment analyst, I conducted store visits to analyze an electronics retailer, Circuit City. Reading Wall Street's reports on the company convinced me that CC (ticker symbol) was an extended warranty company masquerading as a retailer. With a majority of their profits coming from these warranty sales, I watched in amusement as their salesperson went for the quick close on a warranty sale with this pitch "you do realize that where these TVs are made, the workers live in primitive huts." I heard it more than once during my visit so clearly was part of their sales training program and must have been somewhat effective. With a big commission on these warranty sales, their salespeople had strong incentives to come up with ways to instill fear into the hearts of electronics shoppers. Circuit City is no longer with us and somehow it seems like just desserts for a business model reliant on peddling high profit warranties. 

What do the experts say about extended warranties? I thought I would skim some articles to see if there was a consensus to be found:

• Consumer Reports has simple advice: Don't buy them!: "When you need to repair your car, refrigerator, computer, or a major system in your home, it’s comforting to think you won't have to break the bank to pay for the fix. That’s why so many people are open to the idea of buying extended warranties that cover repair costs from the many companies that sell them. These protection plans are also sometimes called service contracts or protection policies. But by whatever name, our advice is the same: Skip them. Extended warranties can have many gotchas, relying on contract fine print to deny coverage for almost any reason. They've become a major source of complaints to the Better Business Bureau and elsewhere."
• Fortune Magazine says skip the smartphone warranty plans: "But consumer advocates say most phone owners would be better off skipping the costly insurance plans offered by Verizon and other carriers. The problem is that the costs of the equipment protection plans are high, and the benefits of repairing or replacing phones are reduced by deductibles, quality issues, and other loopholes."
• Consumer Reports does come up with a scenario where an extended warranty might make sense: "About 30 percent of used-car purchasers who had owned their car for a year or less and purchased an extended warranty to cover it needed to use that warranty in the first year of ownership. But two-thirds of drivers needed that additional coverage in years two through five of ownership. And while the extended-warranty industry has taken a bad rap for not paying claims, 84 percent of used-car buyers who had to use their extended warranty said that all of their claims were honored. And 82 percent of all extended-warranty buyers said they would consider getting one again."

What's your philosophy about buying warranty insurance? What has your experience been with this product?

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Looking for inspiration on insurance lessons and activities? Check out NGPF's Insurance resources!

Works Cited

Larsgaard, Joel. "Is it Cheaper to Repair or Replace These 9 Electronics & Appliances?." dealnews, 13 Aug. 2015. Accessed 4 Sept. 2017. Path: https://www.dealnews.com/features/Is-it-Cheaper-to-Repair-or-Replace-These-9-Electronics-Appliances/1422013.html.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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