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by sitecore\kmcgrigg on March 30, 2010

If you buy a product that has the potential of breaking down mechanically, you probably have the option to insure your purchase. In fact, extended service contracts are offered on everything from cars to cell phones. To many, a relatively inexpensive service contract seems like a good way to protect their investment. According to the FTC, an estimated 50 percent of all new car buyers, and many used car and major appliance buyers, purchase service contracts.

Typically, the contract costs a few dollars extra, depending on the original purchase price, and involves an extension on the existing warranty. In other words, if you buy a $75 answering machine with a 30-day warranty, you may have the option of spending an additional $6 on a service contract, which extends that warranty to a full year.

Unfortunately, the costs of service contracts can add up quickly. Consider a young couple moving into a home they’ve just purchased. Often, this means spending a lot of money in a short period of time on major appliances. If you have to buy a washer, dryer, refrigerator, dishwasher, microwave, and lawnmower all at once, the cost will likely be more than $2,000. If you buy a service contract with each one, you could spend an additional $200. That’s a lot of money to spend, especially when the likelihood of something breaking down is fairly small. Following are a few things to consider when determining whether or not a warranty is worth the extra cost.

Determine your comfort level. For some people, the peace of mind is worth the increased cost. Also consider if you would be able or willing to pay repair costs if they became necessary.

Think about how the item will be used. If you purchase an appliance and only expect it to see average use, the service contract may only benefit the manufacturer. The majority of new products work fine for several years, which is longer than the time period covered by most of contracts.

Compare warranties. Read the existing warranty to see if additional coverage is even necessary. Look for duplicate coverage to be sure that you are not paying for the coverage twice. Also, if you pay for an item by credit card, find out if the creditor offers their own form of coverage.

Read the fine print. Coverage may only apply for certain parts of the item. Most contracts will not cover repairs if the item has not been properly maintained.

Figure out the total cost. Some warranties also have deductibles, making the warranty more costly. Other services charge a fee each time the warranty is used.

Shop around. Warranties are offered by manufacturers as well as third party providers, so it pays to compare costs and services.

If you are unsure whether or not an extended warranty is worth it, buy yourself some time. In many cases, you can purchase a warranty at a later date.

Comment(s)

Bob Walczewski says:
April 01, 2010

Extended warranties are so expensive on some items that it would have to break more than once in order to get your money's worth.



Delia Lara says:
April 02, 2010

I liked your article about service contracts. It reinforces my feelings that they are not a good thing and I don't get them anymore. I found out that I have never used them in the past. Thanks!



Duke Stregger says:
April 01, 2010

Great article Kim ! ---As for the price of "new" household appliances,the $2000. number used seems low. A fridge and stove could total well beyond that $. Service contracts on household appliances could also total $200 and up for EACH appliance. It does add up so buyer beware! Keep up the good work with MMI !



Karen Arntz says:
April 01, 2010

We have all our major appliances covered by our utility company. Very inexpensive, covers heater, washer, dryer, hot water heater, diswasher, oven and fridge. Comes as part of the electric bill. Had to call a few times over the years, and always got good service.



Kathie Jones says:
April 01, 2010

I always get confused with purchasing insurance on a cell phone. The deductible is $50 but if you have to buy one before your eligible it can cost $200 or more. (I did wash one in the w.machine once) I've never had luck with 'reburbished' phones. What say ye? thanks



Kim at MMI says:
April 05, 2010
Website: http://www.moneymanagement.org/Community/Blogs/Blogging-for-Change

Kathie, From what I understand, warranties and insurance on cell phones are two different things. Insurance is ongoing and you pay monthly, while a warranty is likely to have a one-time payment with coverage that lasts a set period of time. With either, I would take a lot of time to determine what you are getting for your money. For example, you may not be covered if you lose your phone. (I know this from experience since I once flushed a cell phone down the toilet!) If you are happy with the coverage, make the decision based on cost. If you simply saved the money instead of purchasing insurance or a warranty, how long would it take you to have enough money set aside to cover the cost of a new phone? Good luck with your decision! -Kim



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