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Peace of mind from extended warranty? Maybe not

Service contracts are major money spinners for retailers; that's why they push them aggressively. But many people never use them, forget they have them or find their issue isn't covered.

December 24, 2010|David Lazarus

It's a question that shoppers get asked a lot — by car dealers, electronics salespeople, even at the toy store: Do you want to purchase an extended warranty with that?

With Christmas about to pounce, and post-holiday sales around the corner, this is as good a time as any to answer that question.

Generally speaking, extended service contracts are major money spinners for retailers; that's why they push them so aggressively. Many people never use them, or forget they have them, or are frustrated to learn that their particular issue isn't covered.

And generally speaking, most products already have a manufacturer's warranty covering at least the first year of use (when bad things typically go bad) and are designed to last long enough to give you your money's worth.

"If the merchandise costs less than $100, it's probably not worth having an extra service contract," said George Whalin, a Carlsbad-based retail consultant. "But if the item costs more and is relatively complex, you might want to consider it."

He offered his own experience as an example. Whalin said he purchased a fancy flat-panel TV, and almost as soon as the manufacturer's warranty had expired, some component inside went kerblooey.

"A service call would have cost a fortune," he said. "But because I had an extended service plan, I was OK."

So there you have it. Or not.

"I completely disagree," said Mark Kotkin, director of survey research for Consumer Reports, the publication that tests and rates thousands of items. "Even for an expensive TV set, the cost of repairs can be reasonable, and flat-panel TVs are generally reliable."

He said data amassed by his organization show that the cost of the typical extended warranty for various products is about the same as the cost of the typical repair.

Because most products are either covered by the manufacturer's warranty or simply don't break down, Kotkin said it's usually wiser to pocket your cash and play the odds.

For example, the median extended warranty for a laptop computer was $200 as of a few years ago, according to Consumer Reports. The median repair was $200.

The median extended service plan for an electric clothes dryer was $125. The median repair was $120.

Both Kotkin and Whalin said businesses push extended warranties on customers because they make tons of money from them. Profit margins for service plans run as high as 80%, they said.

When it comes to cars, Kotkin said service plans can be justified if the vehicle has a dodgy track record. He advised buyers to do their homework before closing a deal.

Kotkin also said it's very important to read service contracts carefully. Many contain reams of fine print that limit what actually may be covered.

For example, a close reading of Toys R Us' voluminous Buyer Protection Plan — a plan I've been offered more than once this holiday season — reveals a vast array of circumstances that are not covered. For example:

• "Any and all pre-existing conditions that occur prior to the effective date of this contract," which would seem to mean any problem that can be traced to the factory, which can be just about everything.

• "Damage caused by defective batteries or replacement of defective batteries."

• "Parts failure due to a manufacturer's recall regardless of the manufacturer's ability to pay for such failures."

• "Any damage caused by a computer virus."

Those seem like some pretty significant omissions for a plan that can cost up to $249.99 and promises "to take away any worry."

I asked Toys R Us about these exclusions. The company responded with a statement that the Buyer Protection Plan "provides customers with a broad coverage plan for a variety of defects and damages, and peace of mind that if something happens with a product they purchase in one of our stores, they can have it repaired or replaced easily."

It also said the plan "is designed and regularly evaluated by a third-party agency, which creates the terms and conditions based on industry standards."

I'm thinking maybe those industry standards could stand to be revisited.

On the other hand, I have a friend who swears by the service plan he bought for his Apple iPad — not because anything has gone wrong (it hasn't), but because he likes being able to call the company with questions related to the gadget's use or configuration.

Every iPad comes with a one-year warranty and 90 days of free tech support. For $99 you can extend the warranty by another year and call Apple's tech heads as much as you please for two years at no additional cost.

Ultimately, an extended warranty is about peace of mind. If you'll sleep better knowing your car or refrigerator or iPad is protected against many (but not all) hazards, a service plan may be for you.

Chances are, though, you'll sleep just as well without that extra security blanket. And you'll save some money to boot.

David Lazarus' column runs Tuesdays and Fridays. He also can be seen daily on KTLA-TV Channel 5. Send your tips or feedback to

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