Do You Really Need That Warranty?

What you should know before you buy a protection plan

You’ve found the 46-inch flat-screen HDTV of your dreams. You approach the register, plastic in hand, ready to pay. Just then, the store clerk asks that fateful question: “Would you like to purchase an extended warranty?” Like most people you may be at a loss about buying one or not, and for good reason.

For the most part, extended warranties are considered money down the drain for consumers and cash cows for retailers. Extended warranties generate $16 billion per year in premiums paid out by consumers; half of that money is kept by the actual seller (retailers and dealers) selling the warranties, according to Eric Arnum, editor of Warranty Week, a trade newsletter.

But sometimes an extended warranty may prove worthwhile, says Frank Dorman, public affairs specialist for the Federal Trade Commission. “You’d like to think you’ll never need the extended warranty, but if it is a high-priced item, at least consider it because things do break down.”

An extended warranty or service agreement is essentially an insurance product that covers the costs of replacement or repairs to high-price household items and electronics, such as televisions, washing machines, computers, refrigerators, and automobiles. Depending on the item, extended warranties can cost anywhere from 5% to 40% of a product’s price.

“It’s sensible to buy an extended warranty with the same care that you would buy life insurance,” says Arnum. “Look at the type of product, the manufacturer, and the warranty attached to that product. Of course, you should look at the price of the warranty and the cost of the product.” Arnum suggests buying such service contracts for computers, flat-screen televisions, and new gadgets with the latest technology, because labor charges alone can be substantial. He also believes it makes sense to cover low-cost products if they’re made by an unknown company.

Before you purchase an extended warranty on any product, here are some words to the wise:

Read the fine print. Read the manufacturer’s warranty first. Know what is and what is not covered. Federal law requires that warranties be available for consumers to read before they buy. “Whether it’s the warranty that comes with the purchase or a service contract, make sure you read it, understand it, and keep it in a place where you can locate it,” says Dorman.

Look for any conditions or limitations. For example, is there a “lemon clause” included in the warranty stating that after a few repairs the product will be replaced? Check to see if the warranty offers in-home repairs, pickup, or product replacement. This provision would free you from having to pay shipping costs to and from the manufacturer.

Consider the value of the product. Compare the price you’re paying for the product and determine how old the product will be when the extended warranty kicks in. It may be cheaper to just buy a new product than to buy the extended warranty.

Check your insurance policy. Your homeowner’s insurance policy might provide compensation for household items and electronic goods impaired because of accidental damage, loss, or theft.

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