Extended Warranties: Worth The Cost?

It's bad enough when your microwave goes on the blink. Realizing your warranty has expired is salt in the wound. So is it worthwhile to pay extra for extended warranties? The Early Show's financial adviser, Ray Martin, considers the question.

For years, consumer advocates such as Consumer Reports have cautioned against buying extended warranties. But that advice may be in need of updating.

In a recent development, many appliance makers are consolidating the terms of warranty coverage on their products to include one period covering all parts and service. The period is one year; after that, if a part wears out or breaks, you pay. Before this, appliance makers would have warranties with different coverage periods for various parts, ranging from five to 20 years. Now, they say, a simpler and clearer warranty — one that covers all parts and services for the same one-year period — will benefit consumers. The reality is that in most cases, manufacturer's warranties for many appliances will be shorter, so if you want to extend the warranty coverage for periods longer than a year, you will need to pay for it.

Shorter and "simpler" warranties for appliance brands such as Whirlpool, Roper, Estate, General Electric, Hotpoint, Maytag, Amana, Frigidaire, and many other brands went into effect late last year and earlier this year. Some premium appliance brands still offer warranties that apply for more than a year. Some consumer electronics makers have also cut their warranties. For example, according to PC World magazine, Dell used to offer a three-year warranty on numerous products but has cut warranties on some products to just one year — and a few to just three months. Once the manufacturer's warranty runs out, all costs for repairs are borne by the consumer, unless you pay for an extended warranty.

Extended Warranties

An extended warranty typically covers the costs to repair or replace an item during the same period when the manufacturer's warranty runs, and extends for an additional period of time, typically from two to five years from the date of purchase. Extended warranties may also cover items that are never covered by the manufacturer, such as normal wear, damage caused by a power surge, and additional services such as annual cleaning and preventative maintenance.

"Chili Dog With Cheese"
Anyone who buys an appliance or consumer electronics from a major retailer is likely to be asked, "Would you like to purchase an extended warranty with that?" According to reports, many large electronics retailers, such as Best Buy and Staples, encourage their salespeople to offer additional extended warranty coverage on every sale, but they don't directly pay commissions to their sales people on these. Instead, they may pay an indirect benefit, such as a team bonus for the shift that sells the most extended warranties. But sales reps are getting into the game, even having code names for the sales. According to reports, in online forums a good sale without a warranty is a "hot dog" but a good sale with an extended warranty is a "chili dog with cheese."

The feeling among some consumers that extended warranties are just an add-on to boost profits is justified. According to industry experts, the profit margins on these are often 50 percent. According to Consumer Reports, when the cost of an extended warranty exceeds 20 percent of the purchase price of the item, the extended warranty is often not a good payoff for the consumer because the cost of the warranty is not likely to be less than the cost of a typical repair.

When Wal-Mart enters the market for anything, the rules of the game can change. Wal-Mart is now offering extended warranties that kick in only after the manufacturer's warranty expires, meaning that there is no overlap. According to a sampling by Warranty Week, Wal-Mart's extra coverage on consumer electronics costs about six to nine percent of the purchase price, as opposed to 15 to 25 percent at the large electronics retailers. Because of the lower cost for the extra coverage on items purchased at Wal-Mart, buying the extended warranty may be worth it.

A Better Bet On Some Products
If you are thinking that the decision of whether or not to pay for an extended warranty is similar to buying insurance you may never need, you're not alone. The point is that 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. Below is a list of products and repair rates from Consumer Reports:

Product Repair Rates:

Desktop PC: 37%
Laptop PC: 33%
Refrigerator: 28%
Washing Machine: 22%
Projection TV: 16%
Vacuum Cleaner: 13%
Dishwasher: 13%
Clothes Dryer: 13%
Microwave Oven: 12%
Camcorder: 8%
Digital Camera: 8%

Source: Consumer Reports Annual Questionnaire, based on three-year-old products.

Missing on the list above are LCD and Plasma TV sets. Given that these are relatively new products (particularly plasma TVs), there is not yet enough data to determine the odds of needing a repair in the first three years. With the cost of an extended warranty for these products equaling approximately the costs of a repair, it may be prudent to consider buying the extra warranty coverage, particularly if the coverage is less than 20 percent of the cost of the item.

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

But 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 the extra coverage.

Who Buys Extended Warranties

According to Warranty Week, consumers spent more than $16 billion on extended warranties last year. In a PC World survey of consumers who bought products from numerous retailers, including Best Buy, Circuit City and Dell, about 63 percent said they had bought extended warranties — and on average, 71 percent of these consumers were glad they purchased the extended warranty coverage. Of the 37 percent who said they did not buy an extended warranty, only 23 percent said they regretted it and wished they had bought one when their product failed after the manufacturer's warranty expired.

What To Know Before You Buy
Before you buy extended warranty coverage, here's what to think about: