Extended warranties: What’s their worth?

Paul Brand / (Minneapolis) Star Tribune /

Q: I would like to comment on your recent take on whether it is worthwhile to buy an extended warranty for a car. Extended warranties are provided by companies that need to earn a profit. In order to do this, they have to collect more money from their customers than they pay out. It is possible for a car owner to benefit from buying an extended warranty, but most people pay out more than they get back.

Otherwise, the company providing the warranty won’t stay in business. When I buy a car, computer or home appliance, I always decline the extended warranty. If something breaks after the warranty period, I pay for the repair with money I’ve saved by not buying any extended warranties, and I come out ahead.

With regard to deductibles, I used to pay for low deductibles on car and house insurance. After a while I realized this was not the best option, and I switched to higher deductibles. If I have to make an insurance claim, I will pay the higher deductible with money I save on insurance premiums, and I come out ahead. The same principle applies to the deductible on an extended warranty, which is another form of insurance.

A: I received a number of letters and emails commenting on my column regarding my change in position on extended warranties and service contracts. It described how now, after nearly 30 years as a “car guy,” I believe in the value of purchasing an extended warranty or service contract on a new or late-model vehicle that you’re going to keep for long beyond the original manufacturer’s warranty expires.

I agree with the above car owner in terms of extended warranties and service contracts on appliances, home electronics and other relatively low-cost purchases. But with modern vehicles costing hundreds, even thousands of dollars to repair, I disagree.

I certainly respect the position but want to point out that while liability coverage, and in some states personal injury protection, is mandated by law, insurance for your own vehicle is not. Thus, choosing collision and comprehensive coverage is very much akin to purchasing an extended warranty or service contract.

I choose to carry collision and comprehensive coverage on my newer vehicles. With repair and replacement costs potentially in the tens of thousands of dollars, I can’t see operating them with no coverage for a loss from a crash, fire, theft or vandalism.

Ditto health insurance. It’s difficult to imagine the consequences of having no coverage for a significant health issue.

I feel the same way about potential mechanical and electronic failures. Labor and replacement parts for major repairs can easily run into the hundreds or thousands of dollars. Most of us worry about engine or transmission failures as a major expense, but systems such as climate control, electronic steering, anti-lock braking system and traction control, and other sophisticated systems can cost just as much to repair or replace.

The question of deductibles is valid. I, too, carry high deductibles for collision and comprehensive coverage (and health insurance) for the basic reason that I don’t expect to make claims very often. But I recognize that repairs from mechanical and electronic failures, and wear and tear over the 10-plus years I keep my vehicles, are virtually inevitable. Thus, I want to continue protection for the time/mileage frame beyond the original carmaker’s warranty.

I prefer zero or very low deductibles for extended warranties and service contracts because unlike collision or comprehensive claims, which tend to deal with a single large-loss event, mechanical and electronic breakages, failures or problems can occur a number of times, particularly later in a vehicle’s service life — precisely the time and mileage framework covered by these warranties and contracts. I’d rather not have to pay $50 or $100 every time I take the vehicle in for even a minor problem.

As always, life is a matter of choices. In this case, you pay your money or you take your chances. There’s no right or wrong answer. It’s what you’re comfortable with.