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Just Say No

Jennifer Openshaw

No season like the holiday season brings out this experience.

You pick out your favorite piece of electronics -- a PC, an iPod, a game console, a new TV. You look for the best price. You get the "expert" opinion from the tattooed salesperson. You choose and head for the register.

Now comes the real sales pitch.

Regardless of what you just heard about the quality of the gadget, they swear up and down that you should buy the extended warranty. To cover "anything" that breaks; to help you sleep at night.

You ask, "How much?" and the answer comes back in a wallet-ripping $60 for a $250 product. Despite your rolling eyes, the salesperson rattles on, convinced.

And why, you might ask? Because extended warranties are the most profitable part of many retail businesses. While consumer electronics carry profit margins as low as 5%, extended warranties may bring a 50% or higher profit margin. And that salesperson may make more commission on the warranty than on the sale.

At the end of the day, extended warranties amount to expensive insurance. You're insured against some things (product failure) but not everything (you lose it, wreck it, or never learn how to use it).

You pay a large amount for a short coverage period for a product that generally doesn't fail or wear out.

A good deal? Probably not.

Click here for the video version of this story from Jennifer Openshaw.

I find most extended warranties:

• ...are too expensive. At 20% or more of a product's price for a short coverage period, usually one year -- not worth it.
• ...cover the wrong thing. Extended warranties cover internal breakage, but what about the external bezel or jack? What about the coffee spill? What about phone support, which most of us need more than "break/fix" service?"
• ...just plain aren't necessary. Today's electronics and many other products have become simpler and more reliable, most with failure rates of less than 5%, many less than 1%. Chances of a failure -- a covered failure -- are predictably low (which explains the profitability.) Also, products come with a warranty, so check the length of that warranty and check on the availability of tech support on a per-incident basis.

Granted, in avoiding the warranty, you're exposing yourself to some risk. But unlike catastrophic health problems, the risk is easy to manage. Here are some strategies:

• Say no, take the chance. We're talking about a $200 iPod. Not the end of the world if you have to replace it.
• Put money into a repair fund. The 20% of the purchase price you might spend could be saved -- in your own "insurance" or "rainy day" fund. Accumulate these savings across several purchases, and you'll cover most risks (and earn some interest)!
• Use the right credit card. Many credit cards, especially the platinum or gold variety, provide some coverage. Check for details.
• Develop a backup plan. Visualize what you would do if your product did break prematurely. By then, it might be time to buy the latest technology, anyway; the price will have come down -- laptops, for example. Or make a commitment to replace with lower tech (a 4gb iPod to replace the 30gb iPod lost). Or buy a replacement on eBay. It will get cheaper, and lots of used copies should become available.

All said, here are a few places where extended warranties might make sense:

• Cell phones. These gadgets are used hard, and many warranties cover loss or accidental damage. While cell-phone warranties sound attractive, be aware of the terms and replacement costs. I've lost three phones and reached my replacement limit under the insurance I bought. Still, I usually had to pay some fee for the phone. Later, I found that I could get a replacement phone for $30 to $50 even without the insurance, so long as a "special" was going on with a phone.
• Tech support. Warranties covering phone or online tech support can be valuable, especially for the nongeeks among us. A recent Consumer Reports release recommends buying extended warranties on Apple computers because their tech support lasts only 90 days. (Incidentally, the only other product category getting their "thumbs up" was projection TVs because of high failure rates. Best advice: Don't buy one.)
• Accidental damage. For laptop computers and sensitive LCD-screen TVs, accidental-damage coverage may be a good idea, especially if you're a high-risk user susceptible to spills and drops. For example, accidental coverage can be had on a laptop by HP for $100 for a year.

Extended warranty providers don't structure their pricing to account for adverse selection -- that is, the principle that the people who need insurance most buy it. There's one price, no matter who you are (or who your kids are). So if you're among those who need insurance the most, extended warranties might make sense.

Otherwise, just say no.