Win the Extended Warranty Game
It happens to everybody, especially during the holiday season: You're at an electronics store, find what you want, and head to the checkout. You watch as the cashier rings you up. Then comes the inevitable question: "Do you want to extend the warranty on that?"
You probably don't have the slightest idea what's included in the factory warranty, much less the extended one. Will you need it? Should you buy it? Is it worth the money? Why does the cashier seem so insistent that you take it? The only certainty is that if you say "yes" you could see the total cost jump by 20 percent or more.
Here's a video primer on what you need to know:
Extended warranties are pure profit for the retailer: Consumer Reports notes that retailers pocket more than 50 percent of an extended warranty's cost, adding up to billions each year.
Consumer Reports also found that most products rarely need repairs during the period of time covered by the extended warranty. So when it comes to this game, the odds are never in your favor. But that doesn't mean you can't win.Warranties: the free kind
The first thing to understand is the kind of warranties you normally get at no cost: an implied warranty of merchantability and fitness from the retailer and an express warranty of quality from the manufacturer.
The implied warranty guarantees that a new product will work as described and reasonably expected, and that a used product will do the same while accounting for its age and condition. This protects you against false or misleading advertising, and generally lasts four years, though state rules can vary. In some states, retailers are able to negate an implied warranty by selling used products "as-is." For more information on warranty policy, including a list of states where warranties are an obligation by law, check with the Federal Trade Commission and research your individual state's laws.
The express warranty, or manufacturer's warranty, should be included in the packaging and lasts only as long as it says it does. This could be 30 days, a year, or a lifetime. It can cover parts, service or both. It may or may not cover shipping for warranty repairs. But at a minimum it should protect you against a defective product or one that's missing parts. So don't lose it: keep it with your purchase receipt.Warranties that cost: the extended kind
Then there's the extended warranty, which comes in different flavors. Sometimes it just duplicates and overlaps with what the manufacturer's warranty already offers: obviously not worth paying for. An extended warranty is really more service contract than warranty. It normally covers the cost of some repairs — possibly including damage that was your fault, which an express warranty rarely does. It might offer free tech support by phone. The only way you'll know for sure what's covered and what services are offered is to the do unthinkable — read it. Be on the lookout for exclusions and conditions, and if you have questions, don't hesitate to ask them before you buy.What to look for
Extended warranties vary from retailer to retailer and often from product to product. Before you commit to an extended warranty, consider:
What's the reliability of this product and brand?
Appliances are often built to last longer than their warranties, and they're not as prone to wear and tear as more mobile things like small, portable electronics. With appliances, if anything's going to go wrong, it's probably during installation when it's still covered by the manufacturer's warranty. Look up reviews and reliability ratings online to determine how long the product should last. At ConsumerReports.org you can access ratings on everything from cars and strollers to mattresses and digital cameras: it's not free, but for $6 per month or $26 per year, it could be well worth it. You can also go to Google and look up "reliability ratings" and "user reviews.."
How long does the extended warranty last?
It might say "3 years," but if it also says "inclusive," that's from the date of purchase, not from when the standard warranty expires. Decide if you'll want to upgrade before then, or check out product reviews and try to compute the odds of the product outlasting the warranty.
What extras are covered?
The warranty may cover certain parts that need regular replacement, like bulbs in projection TVs or batteries in laptops. Does it cover routine maintenance? How about the cost to ship the product back to the factory for repairs?
What isn't covered?
Just as important as what's covered is what isn't. Many third-party warranty companies do everything possible to avoid any responsibility in the event of a problem. For example, the extended warranty on a refrigerator may exclude the icemaker — the most likely thing to break. I once had an extended home warranty that covered all my appliances. When my refrigerator stopped working six months into a one-year warranty, the company refused to pay. They said because the coils were dusty, I hadn't properly maintained it, thus voiding the warranty.
What risks will the product be exposed to?
Anything that gets moved around a lot — cell phones, laptops and such — will be exposed to more risky conditions than a washing machine. Products used in a business setting will probably be used by many more people and wear down faster. (Note, however, that many warranties will specifically exclude items used for business.) If you have a naughty pet or child, product damage can become a question of when, not if.
How much is the warranty?
If you find a warranty that's long-lasting and covers everything you care about, compare the price of the warranty to the price of the product. If the cost of the warranty exceeds 20 percent of the cost of the product, you're probably spending more than a repair job will cost you — so it still may not be worth it.
You rarely have to make a warranty decision while standing at the register — though the hard-sell you get in the store might have you believe otherwise. You can often get an extended warranty within a certain timeframe after your purchase, sometimes all the way up until the manufacturer's warranty expires. This gives you a little time to research, read the terms and conditions, and see how the product is holding up. So don't make a snap judgment at the register: Ask how long you have to make the warranty decision, and then take your time.
You may not even have to buy the extended warranty from the place you buy the product. There are companies that offer after-market warranties: do a search for "extended product warranty" or "electronics extended warranty."Alternatives
If the free warranties aren't good enough for you, there are other options besides expensive extended warranties from retailers. You can check with your insurance company to see if you can take out a rider on your electronics. This can often be done on a renter's or homeowner's insurance policy, but make sure you understand the rules: the policy might say you can only protect up to a certain dollar amount, that you need a separate itemized list of valuables, or that only the "actual cash value" is covered rather than the full replacement cost. There may be exclusions, too. Here's Travelers' policy on valuable items coverage, and here's the Insurance Information Institute explaining how and why you should insure electronics.
Some credit cards will automatically extend warranties when used to purchase products: look into your card's policies. For example, Mastercard will sometimes double the original warranty for up to one year, provided you use it to buy the product.
And sometimes the best way to win the warranty game is to just not play — instead, pay yourself for an "extended warranty." Set aside the warranty's cost in your budget, and you can save the money for repairs if it turns out you need them. If you don't, the money's available for upgrades or eventually replacing the product with something new.The bottom line
There are lots of variables that influence the extended warranty decision, including product cost, warranty cost, the likelihood of a problem and the terms of the warranty. But there's one thing for sure: there's no way to determine whether a specific warranty is worth the money while you're standing at the register. Read the terms of the warranty and weigh cost vs. benefit. And if you can't decide, you're probably better off without it.
Stacy Johnson is a CPA and has also earned licenses in stocks, commodities, options, mutual funds, life insurance and real estate. He spent 10 years working for three Wall Street firms and for the last 20 years has produced Money Talks News, a consumer/personal finance TV news series that airs in about 80 cities nationwide as well as around the web. Follow him on Twitter &mdash @MoneyTalksNews or on Facebook at Facebook.com/MoneyTalksNews.
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