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Are Extended Warranties Worth the Cost?

Posted July 01, 2011 7:13 AM

Consumers are opting for extended warranties for tablets, smartphones, and other easily damaged electronic gadgets. If you've ever dropped one or irreparably damaged one of these devices, you probably got an extended warranty or insurance on the next one. Is the extra cost justified?

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#1

Re: Are Extended Warranties Worth the Cost?

07/01/2011 8:29 AM

"Is the extra cost justified?" No.

I see it as gambling, betting that the item I purchased will fail. If I thought it would fail, I would get something else.

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#2
In reply to #1

Re: Are Extended Warranties Worth the Cost?

07/01/2011 2:36 PM

GA, although I have opted for an extended warranty recently... I bought a discontinued demo TV for a steeply discounted price... however, the TV was ran 24/7 for a period of time, so i opted to get the extended warranty from the manufacturer to cover any issues with the "used" TV... so far it's not needed, but i have another 3 years to find out... chances are it will fail in 3 years and one day.

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#12
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Re: Are Extended Warranties Worth the Cost?

07/05/2011 11:17 AM

"I bought a discontinued demo TV for a steeply discounted price... " I agree this may be a likely exception to my general rule.

I bough a house several years ago. After three or four years, the controller for the furnace/AC gave out. The manufacturers data, receipts, etc. were in an envelope in the furnace room. Upon review, I discovered all were installed new ten years and one week ago. There was a ten year warranty! Ugh! Well, at lease not real expensive to get it all running again.

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#5
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Re: Are Extended Warranties Worth the Cost?

07/01/2011 5:24 PM

It's all about risk management.

If your risk is low and the cost for the warranty too much, then it is not worth the cost.

However, if the risk is high and the warranty cost reasonably low you may reconsider.

An example would be an expensive engine in an exotic car. The engine factory replacement cost is $34,000! The risk that it will grenade is very low, but... If it does grenade and your regular warranty is expired, can you afford the out of pocket expense?

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#7
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Re: Are Extended Warranties Worth the Cost?

07/02/2011 10:12 AM

GA.

There are sources of info (Consumer report and the likes) that can help us decide if the risk is worth the price of the extended warranty.

As you can see from other blogs, washing machines, fridges and stoves are unreliable these days. The risk of failure is high. If the warranty cost less than a service call, and covers it, one can certainly be justified to "invest" a little more.

I would actually prefer to pay more for a better quality product but it doesn't seem that it is an option anymore. Some of my colleagues paid a lot for their new appliances and were very disappointed by the high failure rate equivalent to cheap ones (they are all bad).

Hopefully, one day, some manufacturers will wake up.

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#3

Re: Are Extended Warranties Worth the Cost?

07/01/2011 2:55 PM

My former girlfriend worked as a sales person for a major appliance distributer. Her commission for selling an appliance was small. Her commission for selling an Extended Warranty or Service Contract on that appliance was significantly greater. In fact, her performance rating was not based on the number of appliances she sold, but on the number of service contracts and extended warranties that she sold.

Draw your own conclusions

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#4

Re: Are Extended Warranties Worth the Cost?

07/01/2011 4:07 PM

No,
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#6

Re: Are Extended Warranties Worth the Cost?

07/02/2011 2:33 AM

From personal experience.. Yes!

Just over two years ago bought a Mac Book Pro from Apple, at 410 days (or there about) not long after the standard warrantee ran out, the computer stopped working.

Took it to Apple, who told me the "mother board" and processor had died. If I had not bought "Apple Care" then that would have cost me over £500/$800 to repair.

Cost at purchase of the computer of "Apple Care" for 3 years... £150/$240....

Well worth it!

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#8
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Re: Are Extended Warranties Worth the Cost?

07/03/2011 4:14 AM

What will be the decision if the new Mac burns out at about 410 days ?

In general, extended warranties are how producers/retailers make profit.

Most stuff is covered up to a year. You were unlucky to get fried at 410 days. If you added up the cost of every appliance you owned and the cost of extended insurance on all, I suspect the total insurance cost would be greater than replacement cost of items that failed (over a 3-5 year period) had they not been covered by extended warranty.

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#9
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Re: Are Extended Warranties Worth the Cost?

07/03/2011 11:31 PM

GA. My thoughts exactly. Few devices I have purchased have died within the extended warranty period, (two to three years) so I would have just lined the pockets of someone else unnecessarily.

Cheers !

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#10
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Re: Are Extended Warranties Worth the Cost?

07/04/2011 10:28 AM

It's a bet that most manufactures win.

The bet is that the cost of maintaining those products covered on an extended warranty will be less (far less) than the revenue secured by the manufacture in the form of selling that extended warranty.

For electronics most failures occur within the first few days of operation. This is called infant mortality.

From that point onward the likelihood of a failure falls at an exponential rate. Exceptions to that are parts or systems that utilize mechanical parts that suffer from wear and tear from friction, heat, etc.

Extended warranties are simply insurance policies and they tend to be carefully calculated to bias the revenue stream so that the insurance company profits as a whole.

Does that make it a bad thing for the consumer? Not always. It just depends on how much risk load you are willing/able to carry.

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#11

Re: Are Extended Warranties Worth the Cost?

07/05/2011 11:12 AM

One saying that we had in engineering school was:

"Gambling is the price you pay for being statistically ignorant."

If you are paying extra, gambling, on whether the appliance will "die" before three years, you should rest assured that someone has worked out the odds. My opinion is the extended warantee is not worth the cost.

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#13
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Re: Are Extended Warranties Worth the Cost?

07/05/2011 12:11 PM

That depends. Let's take an example that is not your typical appliance.

Suppose you buy a speed boat new. The engine is warranted for 1 year. However, you could extend that warranty for 5 years for a cost of $750.

Now, let's say a typical engine rebuild is in the neighborhood of $20,000 for that high performance engine. The odds of a catastrophic engine fault are 500:1 over 5 years.

Would you decline the extended warranty?

Odds are you will not need it, but on that <1% chance that the engine grenades you are out $20,000. That $20,000 may not mean much if you have millions in the bank, but if you are less than well heeled a $20,000 hit is going to put a serious dent in your finances.

For the less than well heeled the extended warranty is a nice safety net for the price.

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#14
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Re: Are Extended Warranties Worth the Cost?

07/06/2011 1:48 PM

Except I've never seen where the extended warranty costs 5% of the protection. Most extended warranties cost somewhere in the range of 25%, definitely not worth the money.

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#15
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Re: Are Extended Warranties Worth the Cost?

07/06/2011 1:51 PM

My extended warranty cost me $20, and it was on a used $500 High Def Flat-screen TV.. The extended warranty took me 3 years into the future... did I mention the TV was a Demo, and a well used one at that? The warranty was WELL worth the purchase, even if it never gets used, the peace of mind it has given me is well worth the $20 bucks i spent on it.

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Re: Are Extended Warranties Worth the Cost?

07/06/2011 1:59 PM

Your deal would be worth it. Yours was 4%. One-third less than the sales tax we fork over to the thieves in Annapolis.

Every time the person at the register quotes me a price for the extended warranty, it always seems to run about 25% of the purchase price and I have to tell them repeatedly "I DON"T WANT IT !!!". Some of them can be persistent because the store (and I won't name them but it might rhyme with Waist-High) makes killer profits off of them.

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#16
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Re: Are Extended Warranties Worth the Cost?

07/06/2011 1:58 PM

Well, the example below is 4%. Most extended car warranties are probably in that realm.

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#18

Re: Are Extended Warranties Worth the Cost?

07/07/2011 11:10 AM

Just like at the casino - you are playing someone's game and the house always wins in the long run. I almost always turn them down and explain to the sales person: if the % of the extended warranty to sale price is too high (over 5%), it means either you are soaking me or telling me that the reliability of your product is so poor it unworthy of purchase. That shuts them up immediately.

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