Last year, $50.9 billion was spent in the United States for Black Friday. This is the four-day Black Friday weekend and does not include Cyber Monday. Still, that is an impressive number of items sold. Given the popularity of televisions, consoles, appliances and other electronics, wherever big ticket items are sold, you can bet the purchaser was offered the opportunity to purchase an extended warranty or protection plan for it. These add-on services can offer peace of mind when spending a lot of money on a fragile electronic, but do they make financial sense?
Limited Versus Extended Warranties
One of the reasons people may think extended warranties and protection plans are a good investment is because products often come with “limited” warranties. If you have read my previous resume blog post, you know I like to look at how the brain handles these kinds of things. The word “limited” as a concept is so weighed down with negativity, it’s no wonder people balk at it. When you tell someone something is limited, all they hear is that something is bad. Limited means sub par and incomplete. Limited is not good enough, and certainly not as good as other warranties.
All a limited warranty means is that the warranty is limited to its terms. All it means is no one is making any other promises than the promises provided to you in writing. Usually what this means is that, for a specific period of time, any defect due to construction, labor or materials will be fixed or the item will be replaced. There is nothing wrong with a limited warranty like this. It very adequately protects consumers. If I buy a cell phone and drop it on the ground and the screen cracks, I would not expect a merchant to replace it, just like I wouldn’t expect a restaurant to replace a meal for free if my one-year-old Goddaughter if she throws her mac and cheese on the floor.
An extended warranty is a service or maintenance agreement. Again, you can see how attractive it is; extended means longer, bigger, better. These service agreements can expand on covered defects and/or lengthen the protection period. As with limited warranties, you really only get the promises laid out in writing. One thing to remember about extended warranties is that their terms start at the expiration of the manufacturer’s warranty, so you deal with the manufacturer for the first year or so.
The important thing for both kinds of warranties is to read the terms. Don’t just rely on the store to verbally tell you. Often times, extended warranties still only cover defects in workmanship and materials. They do not cover accidental wear and tear.
What Is A Protection Plan?
The important distinction between an extended warranty and a protection plan is, most often, that a protection plan is a separate service and or maintenance contract, and an extended warranty is a contract that extends the terms of an existing contract — except sometimes extended warranties also offer additional restrictions or additional coverage. I think they make it confusing on purpose. I bet lawyers are involved. Protection plans often include accidental damage coverage, which is also separates it from a warranty, and they start at the same time as the warranty. So if you have a one-year warranty and buy a two-year protection plan, you do not get four years of coverage; you just have both for the first year.
Read The Terms
Read the terms. Read them. The terms that is. Read the terms. You can see how confusing the terminology is. You would be remiss to assume you are purchasing one thing based solely on what the store calls it. You may also pass on a product or service that does make sense. So read the terms. If you are looking for a TL;DR version, the only consistent difference is that:
- Extended Warranties begin at the conclusion of the manufacturer’s warranty.
- Protection Plans begin the day you purchase them and run concurrent with the manufacturer’s warranty.
Things to Consider Before Buying A Warranty Or Protection Plan
1. The Implied Covenant Of Merchantability
Most merchants have a warranty that covers material and labor defects. These often last for a year or so. Many people making an investment on an item they expect to use for several years feel this is insufficient. After all, conventional wisdom says these things always break right after the warranty expires. Many states have what is called the “implied covenant of merchantability.” This is a legal idea that, when someone sells something, then that thing should be fit for ordinary use for a reasonable period of time. It is reasonable to expect when you buy a refrigerator that it will refrigerate food for a couple of years. Even if the manufacturer warranty is only for one year, it is likely that the implied warranty of merchantability may provide a remedy if the fridge breaks one day after the warranty expires. Refrigerators should last longer than 366 days. Here is a handy locator tool from Cornell Law School to help you find your state’s section. If you search your local statute for “sales,” you should find if there is an implied covenant of merchantability.
2. Home Owner’s Insurance
Some home owner’s insurance policies can cover items that are stolen. You might be able to add to your monthly premium to cover accidental damage to some of your possessions. This may be less than the cost of an extended warranty or protection plan. Check with your local agent to see what the cost would be.
3. Credit Card Warranties
If you are able to put the entire purchase on a credit card, some credit cards offer an additional warranty at no cost to you. In many cases, you can get a warranty up to twice as long. Be sure to pay the card off before interest factors in, though. We’ve got an entire blog post devoted to which credit cards offer extended warranties and how to qualify. Check it out.
We live in a data-driven world. If you don’t believe me, I’d like to remind you of that time Target was so good at knowing what people bought and when they bought it that they accidentally outed a pregnant teenage girl. Just like you know that the odds are in a casino’s favor when you play black jack, you should know the odds are in the merchant’s favor. Extended warranties and protection plans are a wager between you and they merchant. The merchant is betting you won’t need it, and you are betting you will.
I promise you they know, on average, exactly how often a particular product fails. They have more data about it than we ever will. Not only do they know how often devices fail, they also know what the average cost to repair them is. Take the total number of items that research says will need a repair and multiply it by the average cost. Now divide that number by the total number of protection plans purchased, and you know how much you need to sell each protection plan for to just break even. Add a nice profit margin, and then even when the merchant “loses” the bet, they still come out ahead.
Instead of thinking of it being you versus the merchant — since the merchant is going to win regardless — think of it as you betting against yourself on whether or not you need it. There is nothing wrong with one of our cash back merchants making money. They do it on every product sold. Consider for yourself how you’re going to use the item. If you are buying a laptop but will very rarely transport it, that is a different situation than a college student lugging it around campus from class to class.
When to Buy a Protection Plan
If the cost to add the item to your home owner’s policy is too expensive, you don’t want to worry about the hassle of an implied warranty, you can’t or don’t want to put the entire purchase on a credit card or you want that extra peace of mind, when does it make sense to buy an extended warranty or protection plan? Since we are more than happy to give our opinion, lets take a look at some of the most popular items to get protection plans for. We found one website, SquareTrade, that purports to release the failure rates for products that it covers. The chart shows failure rates for products between three and four years old. You might have noticed most protection plans are only three years long. SquareTrade specifies that failure rates in the fourth year are 10 percent higher across the board. What we have done for our discussion is subtract 10 percent from the charts fourth-year numbers. SquareTrade is in the business of selling extended warranties and protection plans, so I don’t take their numbers as gospel.
This is one that is very dependent on how the product is used. Some people set their laptops up in their houses like a desktop and never move it. Those people probably won’t need a protection plan or extended warranty. Most people purchase a laptop to take advantage of its portability. I like to use mine to sit on the couch and play computer games while my wife binge-watches “Bones” on Netflix. If you are a person interested in portability, the chart shows that one in three laptops used the warranty over a three-year period. This gels with my personal experience. I tend to err on the side of caution and shell out the money for a protection plan for laptops.
The chart shows that roughly one in five required a repair. The most common failure we imagine is probably the hard drive. You can get a replacement 1 terabyte hard drive for less than the cost of a repair plan (you can read more about HDD vs Solid State Drives in this blog post.) As long as you make sure the vents are clean and got a computer from a trusted brand, this failure rate seems high. I usually pass on the protection plan. Remember, though, the plan is likely to be more expensive than a typical repair anyway. And you can get a replacement hard drive for $50-$100.
Unfortunately, tablets don’t get a slot on the chart. Since the lowest failure rates on the chart are 6% , we wonder why they were not included. Is it because the failure rate is so low there is no meaningful data? Tablets have a solid state drives and a fairly durable screens. I do not have extended warranties or protection plans on either of my tablets. Most likely, repair is going to be a cracked screen, which runs you about $100.
There are a lot of horror stories from early Xbox 360 adopters about the “red ring of death.” The data also backs that up. Within two years, 23.7 percent of 360s required service, while only 10 percent of Playstation 3 consoles required service and 2.7 percent of Wiis required service. The issues with the 360 seem to be largely absent from this generation. Don’t keep your console in an enclosed space because it generates far more heat than, say, a Blu-ray player. If I was buying a 360 and the plan cost was very low, I might consider it. Otherwise, it looks like this is another instance I would pass on the extended warranty or protection plan.
It would seem that appliances, stationary devices with minimal interaction, should have a pretty low repair need. From the chart:
- Refrigerator/freezer combo with side-by-side doors and an ice maker have a 27 percent failure rate
- Front-load washers have a 19 percent failure rate
- Top-load washers have a 12 percent failure rate
- Dishwasher’s have an 11 percent failure rate
- Top/bottom fridge/freezer combos have a 10 percent failure rate
- Dryers have a 5 percent failure rate
These failure rates seem a little high for the side-by-side fridge and the front-load washers. The other appliances seem to have acceptable gamble rates. Ninety percent of the time you won’t need the plan, and when you do, the plan is likely to be the same price as the repair. I have not gotten a plan for any of my appliances, but if you wanted to get one for the top two items on the list, it wouldn’t be a bad decision
My Goddaughter loves to play with my phone. Sometimes she throws it across the room. Sometimes she bites it. Sometimes she puts it in the toilet. I have an Otterbox phone case and pay the $9.99 for insurance. It would cost me $339. 76 to replace my phone — $239.70 for the monthly insurance fees over the two years of a typical contract plus a $100 deductible — when my phone cost $600 when I bought it. The $9.99 is on my bill, and I don’t notice it, so for me it seems like $100 to replace my phone. Once every two years. Its been dropped in a river, stolen at a Stanley Cup parade, left on the window sill and shorted out when it rained, and it is worth it for me. The trick is to need it before the new model comes out and the price to upgrade drops to $99 do you don’t pay $339.76 for a $99 phone. See how they get you?
LCD HDTVs are also not on the chart over 36 inches. The 4 year failure rate for those was six to 8 percent. Investigating this issue further, we found an old issue of Consumer Reports that puts the failure rates for LCD HDTVs at right around 3% for most major brands. This was for televisions sold between 2007 and 2010. It does put the failure rates of these HDTV sets at about the same rate as the smaller TVs in the chart. It is survey based data, but it looks like of all TVs needing repairs, 76% had an issue within the first year, and were fixed under the manufacturer’s warranty at no cost to the consumer. There were some cheaper brans that had an 8% failure rate, but given how many fail within the regular warranty and the already low failure rate, we do not see a need to buy the extended warranty or protection plan for HDTVs.
Other than for laptops and cellphones, extended warranties and protection plans aren’t likely to be worth it, but peace of mind can trump pure mathematical considerations. We just want you to make informed decisions on whatever you buy. Make sure to get cash back on big ticket items through FatWallet, that way if you get a plan or warranty, the cash back you earn can offset the purchase. Plus, you’ll experience no pressure sales from associates who get a bonus or commission on sales of extended warranties and protection plans.