Recently, I was faced with a situation where I had the option of obtaining an extended warranty on a big-ticket item. This brought up the larger issue of when anyone needs to buy a warranty on any items. A warranty is, at its essence, an insurance policy on a product that you purchase. In the event something goes wrong, you are supposed to be insured on it. However, as a Consumer Report study found, most warranties are really insurance policies with loop-holes you can drive a truck through (I could not find the entire article).

Having said that, rather than dismiss all warranties outright, here are the worse case scenarios in product warranties:

1. Exclusions are greater than the coverage. Warranties are insurance and insurance should be looked at for what it doesn’t cover more than for what it does. For example, if you commit suicide, your life insurance policy is void. If you participate in extreme sports, you may be voiding the terms of your critical illness or disability insurance. In product warranties, if you drop your laptop computer and it breaks, most warranties will not cover accidents. Most warranties will not cover wear and tear damage either. In essence, a product warranty will not cover you from the things you think it should. Instead, it covers freak occurrences such as your laptop computer battery catching on fire. The other thing to remember is that warranties only cover the direct damage (i.e. we will replace your computer if it catches fire) and not the indirect damage (we cannot pay someone to recover your lost date when your computer caught fire).
2. There is no Cost Benefit. When laptops use to regularly cost over $2500.00, it may have been worthwhile to purchase an extended warranty given how expensive it was to replace one. But when computers sell for under $1500.00 now, what is the cost benefit of purchasing a $250 warranty that has more exclusions to the coverage than the actual coverage? Products that once may have needed warranties because of the high price point have become so affordable that it may be cheaper to replace the product with a more technological advanced model than go through the hassle of applying for warranty protection. Having said that, an extended warranty on a car may be worth it if you drive a lot (but wear and tear is excluded on car warranties). But…
3. Warranty is Issued by a Third Party. Here’s the kicker- someone other than the manufacturer could be offering the warranty protection. This happens a lot in the automotive industry. The dealers set up a separate company that covers the warranty (aka self insuring). If there are too many claims for the separate companies’ comfort, it could always wind itself up and the dealer has no liability and you have no recourse on the warranty. The equivalent in electronics is a warranty issued by the retailer and not the manufacturer.

Do I ever buy warranties above and beyond that built into the purchase price? No. As a friend who once worked at a car company told me, the fattest commissions come from the sale of warranties by salespeople. I also tend not to buy very technologically advanced or overly complicated gadgets. The more complicated things are, the easier they are to break. I try to buy nice reliable things and play the averages it will last a long time. If you are offered a warranty, read the fine-print carefully; if you see all three worse case scenarios described above run for the hills.