Personal Finance

Five guidelines to help you decide whether to pay up or self-insure
By Gail Bebee | 05/08/10

I recently purchased a new flat-screen television at a popular local electronics store. During our discussion on the features and benefits of the various sets, the sales associate repeatedly emphasized the virtues of the extended service plan available to protect the purchase. I've heard this pitch before.

About the Author
Gail Bebee is an independent personal finance speaker, teacher and the author of No Hype--The Straight Goods on Investing Your Money. She can be reached at gbebee@gailbebee.com; her website is www.gailbebee.com.

These plans, also known as extended warranty insurance, are available for almost every consumer product, be it automobiles, electronics, major appliances or even your new sofa. The question for savvy consumers is whether the cost of protection is worth the price.

After I moved beyond the idea that these warranties exist because the merchandise is shoddy, I took a closer look at the lucrative world of extended warranty insurance. I've distilled what I've learned into five guiding principles:

1. A cost-benefit analysis is a necessary part of the purchasing decision. The first thing to realize about extended warranties is that this insurance applies after the manufacturer's warranty expires. In some cases, the manufacturer's warranty may be all the protection you need.

Take, for example, the Hyundai Elantra that my husband and I purchased last year. The car comes with a five-year, 100,000-kilometre limited warranty. The dealer offered to sell us an additional two years of protection for about $2,000. Since we plan to keep the car for six years, we would be paying significant dollars for just one year of protection. Surmising that eligible vehicle repairs during our final year of ownership would probably be less than $2,000, we decided the insurance was not worth the cost.

2. Consider whether the product value may be otherwise protected. Your new product may already be protected beyond the manufacturer's warranty period if it is purchased with a credit card that has an extended-warranty feature. For instance, my CIBC Dividend Visa card has an extended-protection feature that doubles the term of the original Canadian or U.S. manufacturer's warranty up to one year on most new consumer items. So, before you go shopping, it's wise to review the features of your credit card to see if you have this kind of coverage.

3. Understand the limitations of the insurance contract. No matter what the sales associate promises, take the time to read the terms and conditions in the extended-warranty contract before you buy. Some features, such as extended-service plans that add in-home service during the initial manufacturer's warranty period, offer valuable convenience. Others make the insurance of questionable value. Would you still purchase an extended service plan that automatically expired after the product was replaced once?

4. Self-insurance may be your best option. If your trendy electronic toy breaks down after the manufacturer's warranty expires, you probably don't want to repair it. You'd rather buy the latest version. In this case, it makes sense to forget the extra insurance and allocate the money saved toward a future purchase. In fact, self-insuring your consumer purchases -- declining all warranty insurance and paying for any product repairs out of pocket -- could be the most cost-effective choice for your household.

5. Ask if the insurance premium is negotiable. Our new 40-inch LCD TV retailed for about $800. The sales associate offered us an extended service plan for two additional years for a premium of "only $190." When I hesitated at the cost, he quickly lowered the price to $160. Lesson learned: when buying extended warranty insurance, don't accept the first price offered. Negotiate.

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