When Warranties Might Actually Be Worthwhile

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If you've ever bought a computer, a cell phone, an appliance, or any other purchase of relative value, you've probably been offered an extended warranty. Maybe a salesperson asked you if you wanted to purchase Apple Care after you bought a phone Or maybe you were offered an extended warranty at checkout on a website when you were making an online purchase And at that moment, you might have wondered, Paying a little extra now for an extended warranty, say fifty or one hundred bucks, or maybe a monthly fee of something like sixteen dollars? Will that save me a big repair bill if this thing breaks? Will it provide me with some kind of insurance against a future hassle In today's episode, I'm exploring this topic with Liam McCabe, a longtime wirecutter reporter LM has been reviewing and writing about large appliances, H vac systems, and home improvement solutions for over a decade Basically, he covers big stuff that costs a lot of money He just published an article that makes a strong argument for why you should almost never buy an extended warranty At least not for most of the things you have in your home We're going to get into the math the psychology and the big business of extended warranties after the break Be right back Mortgage refinancing might sound. SFi makes it easier. With refinancing options designed to fit your goals, you can explore lowering your mortgage rate, accessing cash from your home's equity with your cash out refi, or shortening your lo term. Whatever your next move, SFI can help you find the right fit. Ready to explore a refi? Visit SopFi. com slash power move. Mortgages originated by SFi Bank in A member FDIC, N MLS six nine six eight nine one Terms and conditions apply. equal housing lender This podcast is supported by Mitty Health Are you in midlife feeling dismissed and unheard by the healthcare system? You're not alone For too long, women's midlife health issues have been trivialized and ignored. It's time for a change. It's time for MIDI. MIDI is the only women's telehealth brand covered by major insurance companies, making expert care accessible and affordable MIittDI's clinicians provide one on one consultations where they truly listen to your unique needs, offering data driven solutions tailored for you At MIDI you'll feel seen heard and prioritized. Visit joinMIDI. com to book your insurance covered virtual visit That's join MidDi. com MidDI, the careare womomen Deserve. You've never been one to settle. Stand down or stand still. You're a lifelong learner, energized by excellence. There's a fire inside you you can't ignore. You've got competition to outrun, momentum to build on. and your own high standards to meet Stop now? Not a chance. At Capeella University, we help you catch what you're chasing because you've always had the drive. Now, go earn the degree. Capeella University. What can't you do? Visit Cpella. edu to learn more Welcome back Today, I'm speaking with one of my longtime colleagues, senior writer, Liam McCabe, about extended warranties, and why you should almost never buy one. Liam, welcome to the show. Thanks for having me. I am thrilled to actually have you in the studio this time. We've talked to you before, but it's really nice to see you in person. Okay, you've been reporting about and reviewing appliances, HVac systems and other kind of large expensive things that people buy for their homes for a long time. You did a stint at Consumer Reports and at Reviewed So you've probably thought a lot about when it's worth getting an extended warranty on any number of purchases. So going into this investigation, what was your take on extended warranties? I went into this, I had a period a few years ago of listening to a lot of personal finance experts just to kind of get my house in order They cover a lot of topics, but one that came up in a bunch of places was extended warranties and why it's generally not a good use of your money in pretty much any scenario And I didn't look into it much deeper than that at the time, but I kind of had it in the back of my mind that this might be something worth writing about at some point What is the difference between a manufacturer warranty and an extended warranty?ight. So manufacturer's warranty automatically comes with the product when you purchase it. It's written down somewhere in a pamphlet or on the box or maybe on the product listing online And that is basically the manufacturer. It's their promise against defects usually for a certain period of time. Most commonly, it's about a year for major appliances or expensive electronics. It can be ninety days, it can be Five years, lifetime there's, you know, you have to look at the specifics, but it's automatically included with the purchase Often is like a sweetener to convince you to buy that product instead of something similar So if I buy a washer and dryer combo at Home Depot, it's usually coming with some kind of manufacturer warranty. If I'm buying a computer at Apple,, it's coming with some kind of manufacturer warranty. There's some guarantee that this thing, if it breaks within this amount of time, they'll take care of me, right? Right. And so the extended warranty goes beyond that where you know you're going to have maybe it's like three to five years extended warranty covering certain things if they break, right? Yep. What are some examples of common extended warranties that people might be offered? AppleCare, I think, is one that people will be familiar with So when you buy a phone or iPad or Mac, whatever it is They will offer Apple Care pllus or Apple Care One additional coverage on top of the manufacturer's warranty So believe the iPhone has a one year warranty on it, for example. and that will protect against defects or manufacturing errors AppleCare Plus often protects against accidental damage or sometimes loss or theft And you know the way that they've restructured that one, you now pay a monthly premium instead of a lump sum. So basically as long as you keep paying that monthly premium you will have that extra protection on that product. You know, if you are bought into the Apple ecosystem, you surely have been offered Apple Care what are some other examples, like common examples that people might run into? Yeah, Best Buy Geek Squad is kind of a long timee popular one. They now have a store membership program that offers similar benefits You know, even checking out on smaller e commerce websites, you'll usually see some kind of protection plan offered. There's smaller companies like Mulberry is a newer one. Extend And on Amazon, for example, you'll see Asurion, which is actually one of the bigger companies. They have like a big bundle. just you know, you pay sixteenllars ninety nineents a month for Surion compleomplete Protect, I believe it's called, and that will cover everything that you buy on Amazon that's eligible. There was someone I talked to for the story who had purchased that and his headphones broke right outside the manufacturer's warranty period. S around plan. covered him and he filed a claim with them and got the process started Got a little more complicated than that, but Liam, when our journalists are reviewing different products, they are oftentimes looking at the warranty as one of the pieces that they're considering and whether they're going recommend something. So when I used to cover sheets for instance, we really loved LLBan because they had this great one year return policy at that point How should people be thinking about their purchases when they're thinking about that manufacturer's warranty? Like let's set aside the extended warranty for a second Is there value in these manufacture warranties? And how long should they be? Yeah, so manufacture warranty, you can absolutely look at it when you're considering buying a product. It's just part of the deal You don't have to decide whether or not you want it. They just give it to you. So takeake that into your calculation when you're deciding whether you want something or not And yeah, there are many cases where we recommend something because it's got a better warranty than some of its competitors, I think. Maybe our electric kettle, like the Cuisart kettle that we recommend has a longer warranty than some others like it. Some of our luggage picks, Leatherman multiools is a famous one. You know, they will repair it, I think, just for the cost of shipping for years after you buy it So if you know that this product you're about to buy, you're going to want to have it in your life for a long time Yeah, maybe pay extra for a version that has a longer warranty. You can't always find it. There are a lot of categories where that just doesn't really exist for major appliances in particular, it's just usually one year across the board with a few exceptions. And I think we often gauge the length of a warranty as a measure of how confident the company is in the durability of that item. You know, that's the way that I think a lot of people think about what a warranty means. and I don't really get into this in this story. It's something I want to look into a little more I think it's more complicated than that. I think the warranty itself can be used as a marketing tool. and there's nothing wrong with that. It signals confidence whether or not the quality of the product is really superior or not. There is one research paper I found, and again, this isn't in this story, but since we're talking about it Products that are best positioned to offer the longest warranties are very high quality and very expensive products, which makes sense because you can build it to a level of quality that unlikely to fail Plus you've also charggeed so much upfront that you can build in the cost of service into your business plan as a warranty, as a company that's on the hook for that warranty The other kind of business that can offer a really good warranty is a company selling a very cheap product because it costs very little to replace if you can manage to convince someone to pay an inflated sticker price, something with a relatively high margin compared to what it costs to produce then yeah, you can just swap them in and out. Yeah, the example of that, I'm not going to name names because I don't want to throw any companies under the bus, but my husband loves a certain brand of sunglasses. they break pretty regularly like every eight months and he has used the warranty to get these sunglasses replaced like five or six times. Exactly. ye. Okay. So Liam, what's the big takeaway when you're looking between a manufacture warranty and an extended warranty? So the manufacture warranty is included with the purchase of the product. You get it No matter what. The extended warranty is optional. You will often be offered protection plan, extended warranty when you're checking out either at a register or you know on a e commerce checkout page you actively have to choose to buy it and it costs extra theory, it kind of sounds like an extended warranty is kind of a responsible choice. Like you might buy it and think that you're doing the quote unquote right thing or the responsible thing. I bought an iPhone last year. It was very expensive and I got Apple Care because at the moment when I was buying this thousand dollars phone, you know, I don't want to have to pay to have the screen replaced if I crack it or if something goes wrong But in your piece, you really lay out the argument for why these extended warranties are what you call a quote unquote terrible investment. So tell me more, why are they a terrible investment? So the amount of money that you spend to get that protection is usually more than the protection that you'll get back. You know, I'm not going to do math out loud in public, but researchers have studied this, persononal finance experts have looked into it The likelihood that the product will fail during the extended warranty period is quite low. People overestimate the failure rate So you end up paying these premiums for protection that in all likelihood, you will not end up using. And even if you do use it, there are sometimes cases where you could have done the repair yourself for cheaper or hired a repair technician yourself for less than you ended up paying the coverage And then there's kind of other ancillary reasons why The type of insurance is maybe not worth getting in general Why is this different than other types of insurance? Liam, I am sure that you are not going to recommend that I not have health insurance or someone might not have home insurance. You never do that. So what is the difference here? Yeah, it is a bad idea. So what's the difference between these forms of insurance So what economists and marketing professors and what personal finance experts will tell you is that insurance is a very important tool to protect yourself against financial catastrophe So something really expensive like cancer treatment or a house fire or even a car wreck The cost of that if you don't have insurance is very difficult to absorb. You know it's in the tens of thousands, if not hundreds of thousands or more dollars. veryery difficult for anyone to come up with that money without insurance. when a thousand dollars dishwasher breaks, that's very disappointing and it feels unfair and you are going to feel bad about that. But you can absorb it to some extent and there are ways to replace that thousand dollars dishwasher or repair it for we're talking like in the hundreds of dollars, which I don't want to make that seem like no big deal, but in the grand scheme of things when we're talking about three hundred dollars repair or a five hundred dollars replacement dishwasher versus being on the hook for fifty thousand dollars in damages for a flooded basement, for example It's a completely different scale. Right. So basically, it's an inconvenience with most consumer products if they break or need to be repaired. But as we talked about on this show back in January, when we did a series on the LA Wildfires, if you don't have enough homeowner's insurance, then you could be really in a financial crisis. Yeah. Okay, so that makes sense to me Reading your piece, I was really surprised by some of the statistics about how little some of these protection plans pay out to their policyholders when you compare it to something like homeowners' insurance or health insurance. Can you walk us through the math? When you look at the public financial statements for health insurance companies, for example, ninety percent of what they take in in premiums typically gets paid back out to cover medical costs. They keep ten percent to cover the cost of doing business With home and auto, it's usually something more like sixty five percent or seventy percent gets paid back out to policyholders With extended warranties, you know, not all of them are publicly traded, but the ones that we did find, some of the bigger ones, the payout rate is about twenty five percent. A a little bit less than that. Yeah. So they're keeping seventy five percent of the money that gets paid in. and not using that to cover repairs or replacements So with health insurance Is that regulated? So insurance is regulated on a state by state level, but my understanding is that Most, if not all states set a minimum payout amount that health insurance companies are required to hit Is that also the same with extended warranties? Is there regulation around that? No, not in that way Okay, Wow. So this kind of sounds like a big business for these warranty companies Are they making a lot of money? They're bringing in a lot of money. Okay. So you know, one of the ones I looked most closely at was all state, you know, they do all kinds of insurance and they own a square trade, which is kind of the upstart extended warranty option that you could get online, you know ten, fifteen years ago, I think, at this point They're now owned by all state you can look at their financials, the protection serervices sub segment of All States business. has over one hundred seventy million policies in effect brought in two point eight billion dollars in revenue in twenty twenty five, fiscal twenty twenty five. What about places like you mentioned earlier, Best Buy. What does that look like? Yeah, so Best Buy, they have the Geek squad and their membership plan. They don't underwrite the insurance. They work with insurance companies to handle the financial side Best Buy does the heavy lifting of selling those policies and that is valuable to the insurance companies. so Best Buy gets a commission on those sales And when you look at their financials from twenty twenty five, I believe it was they earned three hundred seventy three million dollars from the sale of extended warranties. And when you look at their total profit, that accounts for about forty percent of their net revenue last year We're going to take a quick break Liam, when we're back, we'll talk about why people buy extended warranties even when the math doesn't work out, and we'll walk through some actionable steps that anyone listening should consider for their next big purchase We'll be right back. Mortgage refinancing might sound complicated. SopFI makes it easier. With refinancing options designed to fit your goals, you can explore lowering your mortgage rate, accessing cash from your home's equity with your cash out refi, or shortening your lo term. Whatever your next move, SopFI can help you find the right fit. Ready to explore refi? Visit soopFI dot com slash power Mortgages originated by SFi Bank in a member FDIC, N MLS six nine six eight hundred nine one. Terms and conditions apply. Equal housing lender You've never been one to settle. Stand down or stand still. You're a lifelong learner, ennerergized by excellence. There's a fire inside you you can't ignore. You've got competition to outrun, momentum to build on, and your own high standards to meet. Stop now? Not a chance. At Capella University, we help you catch what you're chasing Because you've always had the drive. Now, go earn the degree, Capeella University. What can't you do? Visit Cpeella. edu to learn more. Yeah Welcome back. Lam You have this really fascinating detail in your article about how product warranties basically been around for thousands of years that there were likely product warranties in ancient Egypt And you know intuitively, it's understandable why someone would want a warranty for something that they have purchased, especially if it's an expensive purchase But if the math is so bad for extended warranties, why do so many people still buy them? I think it hints at something in human nature. like we just You want some assurances. When you spend money You want it to feel fair There' some theories among researchers about exactly what drives the impulse to buy an extended warranty to spend extra on this protection The leading one and probably the most obvious is just risk aversion, loss aversion the fear of the pain you will feel. if this thing breaks sooner than you want it to hurts more than the pain of spending extra to protect it That makes sense Yeah Okay, so loss aversion is definitely a reason why people are buying extended warranties. Are there other reasons? Some other interesting papers have looked at Alternives, there's one paper that came out last year called The Illusion of Victory. That one suggests that There is sort of a gambling impulse. like people buy them because they think they're going to win. It's not so much that people are afraid of losing. It's just There's some people who think they know a good deal when they see one and they're sure they're going to win There was a study from two thousand nine, I think. The Times actually covered this when it came out suggesting that People are more susceptible to offers to buy extended warranties after they've decided to buy the product in that nice buzzy moment when you've decided to treat yourself to a one thousandve hundred dollars TV or whatever it is, it usually has to be like a fun purchase People seem to be more susceptible to saying yes to one of these extended warranty offers. More so than something utilitarian like a washing machine? That's what the data suggested, ye. Yeah. You know, you have to imagine that many sales associates are coached to try to push these. So I think we've all fallen into this at some point. You just don't even realize that you're being sold something and the pressure or the buzz or excitement, whatever it is Before you know it, you're saying yes to something that was offered by a person who has a lot of practice getting people to say yes to things. So clearly it's a high pressure situation when you're buying something in person with a salesperson, but what about when you're buying products online Yeah, so there are anyone who's worked in web development or anything like that knows that You can test page designs and look for ways to people on that page to do more of the thing that you want them to do And there are a number of kind of upstart embedded insurance companies that have popped up in last five to ten years. The value that they offer to retailers as they put it on their own websites is increasing conversion rates. It is getting more people to opt in to these protection plans Ao is one that I've heard of. Mulberry is another one. They're kind of these digital first companies They don't sell extended warranties in stores that I'm aware of But when you go on their websites and kind of look at their pitch, it's all about making it easier for e commerce retailers performing protection plan widgets onto their website. Right. And so you know, there might be some pop up at checkout. like do you want to add this extended warranty? Yeah. And you're basically saying that, you know, there's a lot of thought that goes into those pop up windows or that checkout flow to try to get you to buy that extended warranty. One would have to assume. Yes. O would have to assume. had a marketing role You know, marketplace style website, a lot of thought goes into how to optimize that funnel, that flow. So they are giving you many opportunities to opt into this. You mention in your piece that extended warranties are handled a little differently in other countries. There's more regulation around them. Can you talk a little bit about that? Yeah, there are a few examples. So in the UK, any retailer selling an extended warranty has been required to post the price of the protection plan alongside the price of the product Australia has a somewhat stricter rule. I think as of twenty twenty one There is a mandatory four day cooling off period. So the retailer cannot offer you the add on insurance, the extended warranty, protection plan, whatever you want to call it, until four days after you've made the primary purchase You said that in the beginning of this process, what got you kind of interested in this was listening to a lot of finance podcasts. What are you supposed to do instead of get a warranty? Instead of buying an extended warranty, what should you be doing instead? The nuts and bolts econ geek way of looking at it is, you know, you should self insure instead of spending the money on an extended warranty, which is a type of insurance You should just hang on to that money put it into a savings account or under a mattress, whatever you want to do. When things need to be repaired or replaced, You just take money out of that savings and pay cash. And the stats suggest that if you do that, you're going to come out ahead in the long Do you have any tips on How to get a warranty honored? These are some tips I got from consumer advocacy journalists who have been helping people navigate similar situations for decades in some cases. You should try to do it the standard way. at first, like go to the claims page, fill out the paperwork, do it that way One advocate that I talked to, Christopher Elliott told me, do that three times. Like give them three chances to do it properly thenen you can start escalating matters. One of the people I talked to who had trouble with his extended warranty pl started calling the company's customer service and asking to get it escalated If you ever run into a barrier, just keep trying to escalate it And there's this now classic technique called the executive email carpet bomb, which was, I think made popular on the consumerist blog like twenty years ago It is not that hard to find the email addresses of people in executive suites at these companies. So if you can find those emails and after you've done everything the right way and you remain Pite and document every step that you've taken Try finding those email addresses and getting in touch with them. So that's basically like the internet version of I want to speak to your manager. Who's in charge? Yeah. So it's like slightly less rude version of storming into the back office to talk to the manager, yeah. Okay What about going in person? It's harder to be rude or dismissive to somebody's face I don't know that this is always the case, but In general, you would think that if you can get a human to interact with you and maybe just physically swap out the products It's going to go more smoothly than shipping something in hoping that it gets there You know there's someone I talked to who liivved an hour from the service center that she was instructed to send her phone into for repairs. Somehow it took a week to go seventy miles and then The phone was just missing from the box when it arrived and Nobody really seemed to want to help She said she would have been perfectly willing to just drive that hour to do it, knowing that she had handed it off to somebody So I think it's a psychological thing for people to just Kning that their thing It has never left their chain of custody by the time it gets to someone who can do something about it Are there any scenarios where you think it is actually worth getting an extended warranty, even if somebody knows that they might lose money on it? Beacause I'm sure there are some people listening here who are saying, hey, I have a very good reason for getting an extended warranty. I don't have enough data to accurately predict when those edge cases are where it makes good financial or economic sense But there are some maybe psychological reasons where you understand that you're going to probably lose money on this deal, but it's still worth it to anyway. There's one writer who I spoke to who has written in defense of extended warranties in the past He gave me the example that he is self employed his laptop is crucial to him being able to do work on a day to day basis And it doesn't make sense for a self employed person to hire an IT department. So he views the extended warranty on his laptop as standing in for that. It's going to be next day service He knows he's paying more than he strictly needs to, but he needs to have that laptop working at all times like he cannot afford to have the downtime