Tuesday Tip: Don’t waste your money on extended warranties

November 21st, 2014

In all the upcoming shopping madness, there’s one thing you can count one: the big-box salesperson asking if you want to buy the extended warrant on your shiny new electronics purchase. Sure, it sounds tempting, a relatively small premium to protect your new toy, but what does it actually cover?

Truth is, those retailer extended warranties exist mostly to make big profits for the store. The average profit margin on them is about 60% (!), so almost all of the money goes straight to profit and administration of the warranty program. The warranty program isn’t even run by the big box store, it’s immediately sold off to a third party company.

Very few claims are ever paid out, for two main reasons:

1)      The extended warranty doesn’t kick in until the manufacturer’s warranty expires, so you might not see any benefit for years. At that point, chances are the product has been upgraded to a newer model or shoved away in a drawer somewhere.

2)      The extended warranty doesn’t cover the main causes of loss, in any way whatsoever: accidental physical damage (water damage, falls, cracked screens, bent iPhones, dirt in the sensors, fire etc.) or the actual loss/disappearance of the item. These are clearly excluded, which the warranty company can and will use to their advantage. So if you’ve had a camera or a phone for a while, and it’s picked up a couple nicks and scratches, the warranty company will probably blame any malfunction on physical abuse and deny the claim.

Fortunately, your homeowner’s or tenant’s insurance does cover loss and physical damage, for premiums far lower than what the retailer would charge, so if your electronic toys are damaged in a fire or lost in a sewer backup, you can count on the insurance company to replace them with brand new items.

Our advice: be a Scrooge this holiday season and don’t waste your money on extended warranties.

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