Should I Buy The Extended Warranty?

Money Tree Photo by Joshua Hoehne on Unsplash

A friend asked me to help negotiate the purchase of a new refrigerator. She had been speaking with a Salesperson about a model she wanted. They had already agreed to include free shipping, and reduce the price to $1069 from $1194, but my friend wanted to see if she could it get even lower. She also mentioned she was planning to add a 4-year extended warranty, which the Salesperson was offering on discount from $275 to $215.

We’ll talk about other aspects of negotiating a big purchase another time.

Today, let’s focus on that extended warranty and the question we’ve all asked ourselves:

Should I buy the extended warranty?

Spoiler alert: Unless you have a money tree, don’t do it. I never, ever buy the extended warranty.

Back to the fridge – It came with a free one-year warranty, but my friend liked the idea of having more protection on this large purchase.

I understand that.

Wouldn’t it be horrible if you paid $1000+, and 2 years later it crapped out?

Instead of starting by telling her I never buy the warranty myself, I suggested we do some quick research to better understand the warranty’s value.

We went to the manufacturer’s website and confirmed that the fridge comes with a a one-year warranty covering parts and labour. We read on and discovered that the manufacturer was actually offering a bump-up to three years just by registering your purchase with them, although years 2 and 3 only covered parts, not labour.

electroluxapplicances.ca

The 4-year extended warranty for $215 included parts and labour.

Even though it wasn’t an apples-to-apples comparison, it was close enough for her to decide not to bother paying the extra $215. With taxes, she immediately saved $242.95 on her purchase.

Clearly I’m not as smart as I think, as I probably should have negotiated a percentage of the savings for my help lol.

What if we hadn’t stumbled across the free three-year warranty, or what if the stronger 4-year with parts and labour still appealed to her?

I would have asked her to look at it in a different way…

For the extended warranty on the fridge, even with the supposed ‘discount’ to $215, that means she would be paying 20% more on the total purchase.

Imagine if you were buying 5 of the same refrigerator, perhaps so you can have cold beer in every room!

If you added on the $215 warranty to each, the cost of the warranties would add up to $1075.

That’s almost exactly the purchase price of one of the fridges ($1069)!

If you didn’t buy any warranty, you could put that $1075 in the bank or even under your mattress. Then, if one of the fridges completely failed within 4 years, you could buy a brand new one, and not have spent any more than if you had bought the extended warranties.

I know peace of mind is important to us, but are we really concerned that potentially one in five is going to crap out?

If so, I think we should be looking for a different make and model!

I know no one is going to buy 5 fridges, but over a couple of years or throughout our lives, we might buy  five different high priced items like a fridge, a car, a stove, a bike, a washer, dryer, dishwasher, etc. etc.

If we bought the extended warranty on each of those items, it would be kind of like my 5-fridge example, just over a longer time period.

Another way to look at it is if the expected failure rate of the item is below the % of the total purchase that the warranty would cost, that means the cost of the warranty probably isn’t worth it.

For example, if we were able to determine that the failure rate of the product was 5%, paying anything more than 5% for an extended warranty probably isn’t worth it.

Now, I know it’s tough to determine the product’s expected failure rate, but presumably you’ve looked at some consumer reviews, and have found a product that doesn’t fail 20% of the time!

It’s highly unlikely even 10% would fail otherwise you’d probably be looking at a recall or at least people going crazy online.

This article from quartz speaks more about consumer’s assumptions of failure rates that often lead to purchasing the extended warranties. It mentions “when a product’s actual failure rate was 5%, people behaved as if it was 13%.”2 and “customers were buying warranties because they were fundamentally unaware of the actual odds of failure. The willingness to pay goes down dramatically if they have the [accurate odds of failure] information”2

Sure, there can be benefits to having a longer or better warranty, but we also need to be aware that the Retailer gets a lot more out of you buying it than you do.

In fact, the sale of extended warranties is a major part of many retailer’s bottom line.

Extended warranties are essentially insurance covering potential repair. In most cases, the retailer partners with an insurance company to manage them.

For example, Walmart Canada partners with Asurion.

Walmart Canada Protection Plan pricing (walmart.ca)

When the retailer sells the extended warranty, they make very healthy profit margins, often 50%+1

So in my friend’s fridge example, of the $215, 50% ($107.50) goes to the retailer just for selling it. They get that much, even though they won’t have to pay a dime for repairs if it breaks down, as the insurance company takes care of that.

Often the Sales Person will get a portion of the retailers $107.50. If not a direct piece, their bonuses may be tied into selling a certain number. That, and their performance reviews and likelihood of continued employment will certainly be dependent on it!

That is why so many Sales People are really pushy when it comes to upselling the extended warranty and the good ones will convince you it’s for your benefit!

It’s funny how they will tell you how great the item is, then after you commit to buying it, they immediately start describing about how easily it could break down.

With $107.50 also going to the insurance company, it’s important to recognize that they also make a profit on it.

They certainly aren’t doing it out of the goodness of their hearts!

And you know they’ve already done the math to make sure that across all the fridge warranties they cover, the costs of repairs will be lower than what they receive in payment!

The same can apply for even bigger purchases, like a car. Check out this article that mentions “55 percent of owners who purchased an extended warranty hadn’t used it for repairs during the lifetime of the policy, even though the median price paid for the coverage was just over $1,200. And, on average, those who did use it spent hundreds more for the coverage than they saved in repair costs.”3

Warranties are so profitable for companies, many offer them on a lot more items than in the past, including many low-cost items.

I was looking at ordering an item on Amazon that was listed at $12.33. A pop-up asked me if I wanted to add coverage with an extended warranty for $5.99!

No, no I don’t.

Besides the fact that this item really doesn’t need any kind of warranty, it certainly doesn’t need one that increases the price by 49%!

amazon.ca extended protection plan

Of course, there will always be the odd exception, but in most cases, the benefits of the extended warranty go to the Retailer, the Insurance company and often the Salesperson, NOT the consumer.

Yes, that means we take on a bit of risk as we may have to pay for repair or replacement, but over the long term across all the items you buy, you should come out well ahead by passing on the extended warranty.

Saving the money you would have spent on extended warranties like with my friend’s fridge is a really great way to ensure we are all Doing More with Our Money!

Thanks for reading!

Mike

1 https://www.fool.com/investing/general/2013/11/23/how-this-retailer-actually-makes-money.aspx

2 https://qz.com/1735597/are-extended-warranties-worth-it/

3 https://www.consumerreports.org/extended-warranties/extended-car-warranties-an-expensive-gamble/

10 Replies to “Should I Buy The Extended Warranty?”

  1. Interesting topic! Yes, gone are the days where a company would actually REFUND an unused extended warranty – Sears Whole Home (and come to think of it, they are gone too…).
    I think you are absolutely right about the value of profit for stores with these extended warranties.
    I once bought a couch at Leon’s for $299, with young kids I knew it wasn’t a forever couch although it’s still kicking The ad’s were on TV and newsprint and it was obviously a loss leader. Leon’s made me wait 30 minutes just to have a Manager “approve” the sale WITHOUT the extended warranty, hoping I would be pressured into buying the warranty as clearly that’s where any profit was for them.

    1. Thanks for the comment, Annie! I don’t mind if some offers it to me, but when it’s high pressure like that I get really upset!

  2. I do find that a little bit of risk is worthy. My old laptop died within a week after the extended warranties expired. After that I get very wary when it comes to these type of “peace of mind” lol

    1. I know what you mean, Louisa! It amazes me how disposable so many products have become these days…

  3. I’ve been prompted by Amazon to buy extended warranty on items that are <$20 all the time. I keep wondering who is paying for this? Great topic as always.

    1. Thanks for the comment, Jacquie! I wonder that too, although I suspect if they weren’t getting any responses, they’d stop doing it, so enough people must be buying it…

  4. Great Read! I never get the extended warranty because I always thought they were a rip off, but never did the math. Thanks for doing that Mike, very insightful thought process.

  5. Hey Mike,great article-I found out when buying a new washer/dryer that some retailers(in our case Dufresne’s Furniture)offer an extended warranty for approx 10% of the purchase price,and if there are no claims made over the warranty period,will give you a store credit for the cost of the warranty.
    Not a refund,but chances are you can use it towards the purchase of something g else that needs replacing!

    1. Thanks for the comment, Peter! That’s a great point – there are the odd situations where it may make sense for you to buy the warranty, so long as you fully understand all the details!

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