QUESTION: I am in the process of purchasing a new computer for my business. The store where I’m purchasing the computer has offered me an extended warranty. Should I purchase the extended warranty?
ANSWER: The answer is a resounding no, you should not.
These policies are a great deal for those that offer them, but they are a terrible deal for the consumer.
There are five reasons why:
Insurance is a losing proposition:
- Insurance companies pay all of their expenses and make money on the policies they issue.
They can do this only because, on average, you will pay them more than they will pay you — a lot more.
Companies continue to offer these policies and insist that their salespeople push them so hard because they are very profitable.
If the policies are profitable for the companies that issue them, they are unprofitable for the consumer that purchases them. Therefore, on average, insurance is a losing proposition.
Over your lifetime, you will purchase hundreds of appliances, computers, cell phones and automobiles. Some of the devices you purchase will break prematurely. The odds are that you will be far better off to pay these expenses out of your own pocket than you would be to purchase insurance to cover their cost.
When our daughter was a teenager, she may have been the exception to prove the rule. Her cell phone most often looked like it had been tied to the bumper of her car with a long piece of wire and drug down the road.
It frequently had missing keys or a cracked screen. Unless you abuse your property in this way, you’ll be money ahead not to purchase the extended warranty.
This isn’t to say that all insurance is a bad idea — it’s not. If the loss against which you are protecting would be financially devastating, for example, the loss of the home you own, you would be well advised to protect yourself with insurance.
Even though, on average, homeowners insurance is a losing proposition, you can’t afford to run the risk that you are the unlucky one whose house burns down.
However, the cost of a television, automobile or new computer that fails prematurely, while disappointing, is not going to be financially devastating.
Therefore, you would be well advised to play the averages. Don’t purchase the extended warranty.
You may be purchasing insurance you already have:
- Most products you purchase will carry some type of manufacturer’s warranty. If your purchase fails prematurely, this warranty may well cover your loss.
If the manufacturer’s warranty has expired, you may be covered if you paid for your purchase with a credit card.
Many, but not all, credit cards offer some form of warranty protection. Find out what other protection may cover your purchase. It’s a ridiculous waste of money to purchase something you already have.
The fine print can be costly:
- Most extended warranties come with volumes of fine print. You won’t read it. Essentially no one does.
The companies that issue the extended warranties know this. However, they know exactly what the fine print says.
The lawyers for those companies wrote it to protect them.
When a claim is filed, if there is anything in the fine print that will allow the company to avoid paying the claim, they will take advantage of it. You may find out that your purchase isn’t covered against whatever caused the damage. You lose, and the company that issued the policy wins. Remember, these companies make money by avoiding claims not by paying them.
Your purchase will depreciate quickly:
- How much is a used computer or a used cellphone worth? The answer is probably less than you think.
These purchases begin to deprecate significantly the moment you take them out of the store. If you are covered for the market value of your purchase rather than the replacement cost, even if you get a settlement, it may be well less than you need to obtain a replacement.
This is another of the things in the fine print that you won’t read.
Not filing a claim:
- Companies that issue these policies count on some of those who suffer a covered loss not filing a claim. Sometimes, the consumer will forget that the purchase was covered. Or they’ll remembered that it was covered, but won’t be able to find the paperwork to prove it.
Whatever the reason, many covered losses go unclaimed. Again, the company that issued the policy wins, and you lose.
The point is, with small purchases, you are far better off to self-insure. That is, don’t buy the overpriced extended warranty. If you suffer a premature loss, cover the replacement cost yourself. In the long run, you will be the financial winner.
Doug and Polly White have a large ownership stake in Gather, a company that designs, builds and operates collaborative workspaces. Polly’s focus is on human resources, people management and human systems. Doug’s areas of expertise are business strategy, operations and finance.