What You Need To Know About Extended Warranties

What You Need To Know About Extended Warranties

Should you purchase or politely decline to buy the extended warranty that’s offered when checking out at an Apple Store or a Best Buy or when completing a purchase online at Amazon, NewEgg, or another electronics retailer?

Sadly, the short answer is, It depends.

Happily, we can help you with this often quick and always important decision by explaining the various types of extended warranties and their terms. We will also discuss the other three factors that go into deciding whether to accept or pass on an extended warranty:

  1. The price of the extended warranty compared to the price of the product for which you intend to purchase it.
  2. The reliability of the product you are purchasing and your expected usage model of it.
  3. Your tolerance for risk or, alternatively stated, your sensitivity to loss.

Extended warranty vs. manufacturer’s warranty

Most consumer electronics devices come backed with a manufacturer’s warranty that protects a product against defects. Typically, a manufacturer’s warranty lasts one year for a consumer product. The standard for business products in the past was three years of coverage but a growing number of business products now include only a single year of coverage.

An extended warranty, also referred to as a service contract or protection plan, extends the warranty for additional years. In most cases, you’ll see two- and three-year plans, but in reality those plans are offering coverage for only one or two years because you are likely already covered for the first year by the manufacturer’s warranty that was included with the your purchase.

An extended warranty falls into one of two categories: a standard protection planand an accidental protection plan. Choosing between these two types of plans will be the first decision you will need to make, so let us have a look at each.

A standard plan generally protects against normal wear and tear and product defects — things like a part failing because it’s a lemon or due to heat, humidity, or dust. For electronic devices such as a laptop computer, check to see if the hard drive is covered as well as the screen (stuck pixel or growing dimmer over time, to name two usual suspects), two of the more common problem areas. The level of coverage of a standard plan is usually similar to that of a manufacturer’s warranty; it simply extends your coverage for another year or two.

An accidental protection plan usually includes everything in a standard plan but also protects your product against damage sustained in an accident, which is usually either the user dropping the device or the user spilling something onto the device. The additional coverage of an accidental plan costs more per year than a standard plan, and you’ll also see one-year accidental coverage plans, which simply add a layer of coverage to the one-year manufacturer’s warranty that rarely, if ever, cover you if you drop your iPad down the stairs or spill a Venti coffee on your laptop at those tiny, unstable tables at Starbucks.

After discerning if accidental coverage is included, there are other questions to consider about the protection provided in an extended warranty.

  • Does the warranty include battery replacement (particularly if the product has non-user-replaceable battery such as an Ultrabook or an iPhone)?
  • Is the screen protected against defects such as stuck or dead pixels or burn-in?
  • Does the warranty protect against power surges?
  • Will the company use new or refurbished parts when replacing a defective part?

In addition to what aspects of your product are covered by a warranty, be sure to take a close look at the service terms. How quickly you can get your product repaired and returned to you is especially important to businesses who suffer big losses and a decline in customer satisfaction if operations are suspended due to product failure.

  • Will you pay a deductible when making a claim?
  • Can you make a claim 24/7?
  • Does the company guarantee returning your product in a reasonable amount of time?
  • Does it cover shipping from you to the service center and back?
  • Does the warranty cover the costs for both parts and labor?

Next, you should investigate who exactly is providing the coverage. Different retailers use different companies to provide extended warranties, and manufacturers themselves often outsource their warranties to a third party. It would be useful to research the company that will hold your policy to ensure it isn’t some fly-by-night enterprise. A good place to start is to check if the company is a member of the Service Contract Industry Council (SCIC).

Two last items to note before pulling the trigger on an extended warranty:

  • Your credit card provide additional coverage for purchases (read more about that below). Likewise, your homeowner’s or renter’s insurance policy provide some level of protection. Check the terms of your credit card or insurance policy before buying an extended warranty so you aren’t buying duplicate coverage.
  • Rarely does a plan protect you against intentional damage, loss, or theft. If you are worried more about losing your phone or getting your laptop stolen, an extended warranty not help you sleep any better at night.

It pays to shop around

Don’t feel you need to purchase a protection plan before you exit Best Buy or complete your Amazon transaction. It pays to shop around for the best price and best terms; you typically can purchase a plan within 30 days of your product purchase. You find better coverage for a better price than, for example, the Geek Squad plans that Best Buy offers in store or on its site.

There are plenty of third-party companies that would be happy to sell you an extended warranty, including AMT Warranty, Assurant Solutions, and SquareTrade. All three companies receive generally good ratings online and are members of the SCIC. We recommend starting with SquareTrade, which boasts competitive prices and clear language on its website about what’s included in its policies.

In general, you’ll find two-year plans (and remember, a two-year plan improve upon the manufacturer’s warranty for the first year but adds only one additional year of coverage) for roughly 10 to 30 percent of the cost of the product. We feel the smart money is to purchase a plan if it’s less than 20 percent of the cost of the product. The odds of you getting your money’s worth from an extended warranty begin to fade when you are paying more than 20 percent of the product, but not all products (or users) are created equal.

No matter what price you pay for an extended warranty, you should know that they are pushed so aggressively in stores because a retailer’s margins on these plans are far greater than the thin margins they reap from the products themselves.

Your credit card already protect you … for a few months

Another possible solution to protecting an expensive laptop from accidental damage is the purchase protection offered by some major credit cards. Purchase protection (not to be confused with credit protection or fraud monitoring protection) is one of the benefits that is more often found on a high-end card such as an American Express card, a World Elite MasterCard or a Visa Signature card. Many consumers don’t even know they have a credit card that offers purchase protection; and even if they do, most consumers never take advantage of it.

Most purchase protection plans cover the theft or accidental damage to eligible items purchased with the card within 90 days of the purchase as long as notice of claim is given within 30 days of the loss. Coverage limitations vary by credit card so you’ll need to check with your credit card company, but most purchase protection plans have a coverage limit of $1,000 per incident and a limit of $50,000 in total claims per card member per year.

Again, most of these plans only protect your purchase for the first three months, but this is something to keep in mind if you have an accident that causes damage to your brand new notebook shortly after you bring it home.

Know thy product, know thyself

Spending 20 percent of a product’s purchase price on a two-year extended warranty for a phone that you will use everyday and everywhere to conduct your business is a better idea than spending 20 percent of a product purchase price on the same warranty for, say, an HDTV from a reliable company that will sit anchored to the wall that you only occasionally turn on.

Before deciding on an extended warranty, you first need to form an opinion of the reliability of the product and then envision how you will use it. Buying a product from a reputable company like Apple or Samsung is different from an OEM reseller that you’ve never heard of.

Just as the quality of products differ from manufacturer to manufacture, tolerance for risk varies for different individuals. Are you the type that purchases travel insurance and is afraid to check baggage because it might be lost? If so, you like the peace of mind that comes with an extended warranty. On the other hand, someone more willing to roll the dice and pay out of pocket for repairs or replacements as they arise never see the value in an extended warranty.

Pranav Jindal, assistant professor of marketing at Penn State, wrote his thesis (PDF) on what drives consumers to purchase extended warranties and at such high premiums. He found that consumers were willing to spend good money on extended warranties due to loss aversion. Jindal explains that consumers are three or four times more sensitive to losses than gains. That is, it feels three or four times more painful to spend money to fix a product you already own than it is to spend the same money on a new product.

Paying $500 for a new laptop is not the same as paying $500 for repairing or replacing a laptop you already own, Jindal told Marketing Sciencemagazine. Consumers view paying for repairs as a loss. Consumers feel it hurts 3-4 times worse than paying the price of the product itself. This hurt drives consumers to buy extended warranties.

With an extended warranty, a consumer is protected against spending money that’s viewed as a loss. And since consumers are less sensitive about spending money on a gain such as a new product, it’s effective for retailers to bundle the price of an extended warranty with the initial cost of the new product, often times at a big markup.

So, the question becomes: are you buying an extended warranty because you have reason to believe your product has a good chance of needing repair in year two or three of ownership (because you are likely protected in year one by the manufacturer’s warranty, save accidental spills and drops) or are you buying an extended warranty because out of fear of losing money toward repairs or a replacement?


We are unwilling to declare that extended warranties should be avoided, as Consumer Reportsreported last year. We don’t know the product you are buying, and we don’t pretend to know your risk tolerance (or sensitivity to loss). And with increased competition in the extended warranty market from companies such as SquareTrade, you have more options if you are willing to shop around for an extended warranty just as you likely comparison shop for the right product at the right price before making a purchase decision.

In closing, we offer the following advice for anyone considering an extended warranty:

  • Find out the terms of the manufacturer’s warranty
  • Determine the reliability of the product you are purchasing
  • Envision how you will use the product to get a realistic idea of your potential for damaging it
  • For businesses, consider how integral a product is to keep your office running and what your losses would be if you were without it for any stretch of time
  • Shop around for the best price while carefully investigating both the coverage provided for your product and the service terms





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