March 3, 2010, 5:00 am

Extended Warranty: How You Really Contribute To A Company’s Profit!

by: The Financial Blogger    Category: Insurance
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You are in the store, all excited thinking that you will see the hockey gold medal final on your brand new (not yet purchased) 58” plasma TV (since 42” is too small these days ;-) ). As you are about to tell the salesman that you will take it, he looks at you and starts his sales pitch.

The thing is that he doesn’t want/need/care to sell you a TV (he knows that you have made up your mind and that you will leave the store with a giant screen anyways!). He wants to sell his extended warranty. His whole pitch is based solely on how great the extended warranty is while your life would suck so much if you don’t buy it.

For every $100, the store gets $50 to $60 in profit!

According to Eric Arnum, chief editor of Warranty Week, here’s how $100 in extended warranty is split:

$50 in profit

$30 in administration fees (gotta love paperwork!)

$20 only is actually used towards actual claims.

I’m not surprised that $7.5MM were made from extended warranty sales in the USA in 2004 (according to Warranty Week).

When you think that an extended warranty could cost around $500 for a big TV, you can figure that the store makes as much money out of the extended warranty than from the TV itself!

What are your chances?

According to Consumer Reports, the chance of having a defective plasma screen within the first 4 years is only 3%! It jumps to 12% when you are talking about a refrigerator… Even then, the cost of an extended warranty can go as high as one third of the original cost.

So far, in my own experience, everything I bought new (tv, computers, furniture) has always lasted me more than 3 years (which is usually the longest any extended warranty period goes for). My first tv is still up and running (since 1998) and my “new” plasma TV is already 5 years old! I’ve had my washer and dryer for the past 8 years too… nothing to worry about so far!

Extended warranty‘s biggest weapon: fear!

Fear is one of the biggest motivators in life and any good salesman knows it. They will ask you what you will do if your TV breaks in 6 months. They will amplify the potential problems you will have when you will contact the manufacturer directly. He won’t forget to mention that you will be on your own, that you will have to ship your goods by Purolator and that it will take forever to repair.

By playing the fear card, he will take away the rationale behind your real chances of buying the worst item in the store. Unfortunately, it works really good in most cases…

What are your options other than extended warranty to protect your purchase?

So if you still think that you need an extended warranty (because we all think how disappointing it would be to drop $2,000 in 13 months to buy another TV!), you have a few options to explore.

When it comes to protecting major purchases such as a plasma TV, computer or refrigerator, you basically have 2 options:

-         Request to read the extended warranty contract and make sure that most of the stuff is covered.

-         Pay with a credit card with an warranty extension (usually, most good credit cards double your warranty up to 2 years additional).

I actually use the credit card option. My Platinum MasterCard (from National Bank) offers me a great protection plan (double the warranty up to 2 additional years). Therefore, I don’t have to mind much when I buy a plasma TV (this jump the warranty to 3 years). Everything is covered according to the manufacturer’s basic warranty (which includes most of the “normal” stuff that could break).

While I have never had to use this feature (I guess it’s the living proof that we don’t really need an extended warranty), the process seems quite easy: you need your original bill, your credit card statement, a formal option on the state of your “broken” good and a insurance declaration.

I am actually in the process of finding out if I can use it to get my laptop screen working perfectly again (I have pixel bars showing here and there). The problem is that I didn’t keep any of my receipts, nor my credit card bills. My latest research showed that I didn’t purchase it with my main credit card (which I think I didn’t have 2 years ago…). So I am still looking to see if my other credit card has the same extended warranty feature… more news later on!

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Comments

I’m with you that the extended warranties are usually too expensive but you should do a cost/benefit on each one. 75% of time I decline them, but I did get one on a laptop, since I figured I would be rough on it, and it paid off. For my $400 bargain TV I wasn’t going to pay $200 for a warranty. If it broke, I would just buy a new bargain TV and it would surely be better than the one I had.

With my washer/dryer it was different. We got one from the liquidation area of The Brick and we decided to get the extended warranty for almost 1/3rd of the price — the price was quite low since it was a liquidation. Good thing we did because it died twice, each time after almost 3 years, and we got a new dryer each time. The last dryer is much better than the first because they don’t even make that model anymore.

Now, to get a dryer that lasts up to ten years you could pay a lot of money up front, or pay for a liquidation one maybe half the price and buy the warranty to cover the lifespan.

by: The Financial Blogger | March 3rd, 2010 (8:52 am)

I actually manage mines as a whole:

I calculate the price of extended warranty of everything I “should” insure (computer, appliance, TV). This would cost more than $1000 which is definitely enough to replace any of these goods in the next 4 years… unless 2 of them break at the same time… this is also a possibility!

Don’t even get me started here… I always laugh (in my head only) when a seller tries to convince me to go for an extended guarantee, as they have no idea how little of a chance they stand to convince me…if they knew, they would save their energy. I had some bad experiences a few years ago with a warranty I had taken with an Ipod, where it actually broke 3 times!!! Remember after 3 times I was supposed to get a new one. But then they told me that the third time, it was still the warranty from the reparation that applied, instead of the one from my purchase..crazy…

Finally, I was able to get a new one…and guess what, they tried to sell me another extended guarantee… amazing and even shocking.

Have you ever negotiated your extended warranty? You can ask for a lower price, be reasonable, and the seller usually accepts it!!!!

Yes fear, that’s the “factor”!! I’ve taken an extended warranty for my car and actually I am quite happy with it (had a few repairs and didn’t have to pay anything). Have you taken one when you bought your car?

I tend to avoid extended warranties like the plague.

i actually go the inexpensive route on a lot of purchases, especially electronics (except for my iMac). For example, I bought a dvd player (not blue-ray) at Wal-Mart 3 years ago for 30 dollars, and it still works like a charm! Did I buy warranty? Hell no, I don’t even think it was offered! Yesterday, I bought a vtech 5.8 GHz cordless phone at Wal-Mart for $24 and it works just fine. Warranty?…you get the idea.

Regarding big ticket items however, it may be worth the consideration, at least in my view. For example, when I bought my 27″ iMac, i bought the Apple Care Protection Plan.

Nice thread!

Extended warranties. They try to push them on you every time you buy something and yes, sales people apply the fear factor. I had a really bad experience with it. Years ago I bought a laptop from Future Shop and my laptop in a 2 year period had to be fixed 3 times. One time when they returned the laptop I had to send it back right away as the entire keyboard part was hanging out, loose. After 3 repairs and some “misunderstanding” from the store part they exchanged my laptop, but I got a much lower quality. And they tried to sell me the extended warranty again!!! Helloooo. Of course I didn’t felt for it.

On the other hand when I bought my new washer and dryer I did buy the extended warranty and 3 years later just 20 days before the warranty expire date I needed the service. It worked out well, with no problems whatsoever. It’s important to read the small print, some extended warranties are just a piece of garbage.

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