Extended Warranties: Peace of mind or a rip off?

Last week I went shopping for a new headset for my computer and when I got to the checkout I was asked if I would like to purchase the extended warranty on the item.

It seems that most electronic store warranties are only 30 days to 1 year - then you have to buy extended warranties if you want to have your item covered beyond that date.

So I wanted to know - are these warranties worth the additional cost (usually 20% or more of the retail price of the item). What I learned really pissed me off.

The reason why so many companies are now offering extended warranties is because it is a HUGE money maker with very little risk. It's all about the profits.

For example:

Lets say you purchase a new flat screen TV on sale for $400 and the extended warranty for 2 years is $80 more (typical price 20%).

The company sells 100 of these $80 warranties a week = $8,000.00 x 4 weeks = $32,000.00 per month (or $384,000.00 per year)

So what does the company pay?

Besides the 1¢ of paper it is printed on - Only 2% of most products break in the first 2 years - so if you do the math, here is what the company is suppose to pay out in repairs:

400 warranties a month @ 2% breakage = 8 items to be fixed

Of the 8 items less than 10% of customers who buy extended warranties actually use them when an item breaks. That means that less than 1 of these items will actually end up getting fixed each month.

The company only pays for the labor & parts (NOT the shipping) which is usually done with cheap labour overseas - so even at its highest they never pay more than 25% of the unit price.

So they charged $32,000.00 per month for insurance that cost them $100.00 in repairs.

This is a no brainer $31,900.00 per month for NO product - all profit! - these companies make serious money on extended warranties!

So what happens when the item you purchased with an extended warranty breaks?

First you have to find your receipt which if you are like most homeowners is buried in a pile of receipts from some previous unknown year...

But if you are one of those rare overly organized people and can find the warranty then you have to pay for shipping to get the item to the repair shop (since they don't usually fix it at the store you bought it from nor will they accept the items there). Then you wait (usually 4 to 6 weeks, sometimes even longer), then eventually your item is shipped back repaired. Be real - are you really going to live without your flat screen TV for 4 to 6 weeks?

Oh yeah, and did I mention that you pay ALL shipping costs which usually exceeds the cost of the extended warranty?

So here is the reality check - Customers may want the assurance that they are buying something good that can be fixed - but when it comes to actually making a claim on an extended warranty, most consumers simply throw it out and buy the next latest and greatest item on the market (rather than fixing old technology). 

Next time you are at the cash register and the kid behind the counter says "would you like to buy an extended warranty?" be honest with yourself - are you really going to use it? 

Instead of giving your money away for free to the big company - Why not take your best friend out for lunch instead.

Laughter with friends is priceless - extended warranties on electronics are worthless...

Kay Kinder - author & consumers advocate © 2011

"Please note the views expressed in these articles are based solely on my own life experiences and thus may not accurately reflect every company out there... use your own common sense when making buying decisions, read the fine print and know your rights."