Do this math to decide on extra product coverage

A few years ago extended warranties, commonly called "protection plans", were only offered for costly appliances and big-ticket items. Today, when you purchase a durable item from a major retailer, you are almost always asked, "Would you like to purchase the additional protection plan with that?"

Many retailers encourage their sales people to offer protection plans that offer extended warranty coverage on every sale as a way of boosting profits. According to industry experts, the profit margins on these are often 50 percent. Some folks assume sales reps are paid commissions directly when a customer purchases these plans from them. But typically, retailers pay their reps an indirect befit, such as a team bonus for the shift that sells the most protection plans. Even so, sales reps are motivated to make the sale. They even have code names used in online forums. A good sale without a warranty is a "hot dog," but a good sale with a protection plan is a "chili dog with cheese."

When to buy protection plans

If you are thinking purchasing an extended warranty resembles buying insurance you may never need, you are not alone. The product you buy may never need a repair at all, and paying for an extended warranty can feel like throwing money away.

But some products are more likely than others to need repairs within the first three years from date of purchase. Consider buying protection plans on computers; laptops; and major appliances such as refrigerators, washers and dryers.

A rule to consider: When an extended warranty costs less than 10 percent of the purchase price of the item, it's often a good payoff for the consumer because the warranty costs less than a typical repair.

Also, if you'll use the item for your small business and quick repairs are important, buying an extended warranty with additional repair coverage may be worth it.

Another way to get extended warranty protection is to pay for the item with a credit card to include extended warranty as a cardholder benefit. Many credit cards extend the manufacturer's warranty up to one year. To find out if your credit card offers this feature, read the credit-card agreement and find what steps you need to take to make a claim under its extended warranty.

Another point to remember: Consumers don't need to make the decision to buy extended-warranty coverage at the point of purchase and under pressure. Many retailers allow 30 days after the purchases to make a decision to buy it.

Check back in a few days when I'll write about what to look for before you buy an extended warranty.

[cheeksforus]

We bought it on a high end GE washer dryer purchased about 5 years ago. In the past 2 years they've been to our house "5" times!! so well worth the cost. Now having noted that will we ever buy another GE appliance Nooooooooooooooooooooo. They are the front load type. The dryer seems to run forever and the washer while using a small amount of water has been a nightmare. Even their repair tech said nowadays its all junk from China. We'll go back to traditional style when these need to be replaced. My mom had a washer for like 20 years, it may be running somewhere today. The old style dryers are simple to repair and both take up less room.

[gthos]

I like Mr. Martin's article on extended warranty math. However, he does not indicate what period of time he's referring to for the warranty as related to his 10% recommendation. One year, two, three, four? Home Depot just quoted me for a 4-year on a refrigerator which I'm interested in buying NOW. Please respond. THANKS!!!!

[raymondmartin]

Hi and thanks for your question. The way to apply this rule is to consider the cost of the protection plan to the cost of the repairs that are possible during the term of the extended period...so when you do this, it does not really matter what the length of the period is....if its three years, and the potential repair(s) during that time could cost 15% of the original cost of the item, and the protection plan cost 10% then it could be a good deal.

So how can you get a sense of the possibility of the item needing a repair and the costs of such? Check onlie forums. Also call a few local repair shops and ask them how often they see the item you are looking to buy in their shops, what are the typical repairs and costs,,etc.
I hope that is helpful.