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What Retailers Don't Want You to Know about Extended Warranties

by on August 12, 2011
in Music and Video, News, Cameras and Photography, Computers and Software, Phones and Mobile, Blog, Money Savers :: 4 comments

Woman shopping for a tv

Call them “protection plans,” “extended warranties” or “service plans,” salespeople at the big box electronics retailers feverishly push these add-ons to their customers. Why?

Though Best Buy hasn’t reported its extended warranty income for over a decade, Business Week estimated in 2004 that it represented 45% of the mega electronic store’s profit, or about $600 million that year.

It’s Not Insurance

Unlike insurance policies, which are regulated by state laws to assure that along with other protections, there are cash reserves to pay policyholders, these “add-ons” are not considered insurance policies and so are not well-regulated.

According to a warranty industry source, in order to bypass state mandated consumer protections, service contract sellers successfully lobbied many state legislatures to have extended warranties classified as “plans” and not as insurance.

In New York State, for instance, companies are not required to cover buyers of these “add-ons” in the event the plan seller goes bankrupt.

The good news is that some plans (including Best Buy’s and SquareTrade’s), are underwritten by an insurance company, but others are not. Third party insurance underwriters did not cover Circuit City’s Firedog plan, leaving buyers holding the bag.

Product Reliability

For most electronic products, the overwhelming majority of failures occur during the first year of ownership, which is within many new products' factory warranty period. A far smaller percent of failures occur in year two and failures continue to diminish in the third year and beyond.

For HDTVs, Consumer Reports’ data indicates that most major brand flat panel sets have a 2-4% failure rate within the first three years. Obviously there is always a chance a product failing in later years, but the percentages there are fractional, with a typical TV lifespan of around 10 years. Remember, flat panel prices continue to fall, so the set you buy today for $1000 could cost around $400 after three years if prices continue to drop at the current rate of about 20% a year.

Smart Alternatives

A. Our advice is to not buy an extended warranty. Weighing the odds of an out of manufacturer’s warranty repair versus the cost of the warranty we (along with Consumer Reports) think it’s a bad deal. The best “insurance” you can buy is a Surge Protector. They’re cheap and guard against power surges that can knock out your electronics.

B. Pay for your purchase in full with a “Signature” Visa card, MasterCard or an American Express card that automatically double up to one year the manufacturer’s warranty. Many cardholders are not aware of this benefit. Check out the links for terms and conditions. Like virtually all extended (and often factory) warranties, making a claim requires you possess your store receipt, along with your credit card statement showing the purchase. In the case of American Express, we have had first hand experience. It works; they credited our card account for the complete cost of a repair!

C. Check out third party extended plans like SquareTrade. They cost less than many brick and mortar store plans and may be purchased within 90 days of your electronic item purchase. Like many other third party plans, ultimately you must first pay for an “authorized” repair and wait for reimbursement by Pay Pal or by check.

D. Costco Warehouse Club members get a free two-year warranty on all HDTVs purchased from them (typically one year mfr. + one year Costco plan).


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Discussion loading



From Rich Moser on August 12, 2011 :: 11:33 am

Good Info—however, from my experience with Apple’s ‘apple care plan’ (which is similar, but from the manufacturer), I do very much recommend buying this in the case of a computer anyhow. It saved me an immense amount of money and was completely worth it.

I bought the 3-year version when I purchased my new iMac four years ago. Within the first two years I had a hard drive failure AND two optical drives die. Any one of these three flaws would’ve cost me more than the price of the “insurance,” which paid for everything. BTW, since then the computer has worked perfectly.




From zz on September 27, 2011 :: 11:54 am

For $170.00 you replaced 2 $50.00 super drives and a hard drive that was already covered under mfg warranty. Huh.
Makes me want to buy a Mac!




From Angela on August 15, 2011 :: 8:12 pm

It is important that the Extended plan / Warranty a customer purchases be through an insured program. Ask your retailer who carries the plan. There are 2 maybe 3 that are Insured and offering compliant programs in every state as well as an Insured Nationwide Repair Network.

Manufacturer Warranty: Guarantees the merchandise
against mechanical breakdown and defects in material and/or workmanship. The guarantee is provided to the consumer with the purchase of the product and without additional consideration.

Extended Service Contracts: Extends the
manufacturer’s warranty on a consumer product for a specified period of time and may cover some defects not covered by the warranty (food spoilage). The service contract is usually sold for separate consideration. Coverage extends to inherent defects in the product structure and to its mechanical breakdown.
A CNN survey indicates that customers purchasing extended service contracts not only feel better about their purchase, they also feel good about the merchant they purchased from.

So they are not all bad…. smile




From Walter Worthy on September 28, 2011 :: 4:35 am

I worked for circuit city until they closed& my daughters camera is still covered.. I know because i’ve had it serviced twice. All repairs are through assurant solutions.. I now work for best buy an about once every two weeks I personally have to assist a customer with a replacement tv because theirs couldn’t be repaired. I’m not on commission & don’t care what a customer get but I’ve seen all too often what garbage most manufacturers warranties can be and how beneficial plans can be when something goes wrong.


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