How much insurance does one need? You have the big four: home,
health, life, and car insurance. Then theres a second
category, which starts getting a little hazy with credit card
insurance, purchase protection plans, fraud insurance and more.
Extended warranties, also called extended service contracts, or
extended service policies fall into the mist of this second
category.
 
Extended warranties are supposed to pay (in full or in part)
for specified repairs for a specific period of time after the
expiration of the factory warranty. They can be a great value.
They can also be a significant waste of money. It gets quite
foggy in the details. What exactly is covered? How long? How
much? Are there hidden charges?
 
There are numerous extended warranty companies and an even
wider variety of warranty packages available: silver, gold,
platinum, platinum-plus, and a host of other
confidence-building words. Whats the best plan, and are
extended service contracts worth the money? Extended
warranties, like life insurance policies, are a numbers game.
Theyre a gamble. You pay dollars2500-dollars4500 for a 2 year,
100,000-mile protection plan and hope that you get at least
that back in warranty repairs. The provider on the other hand,
hopes to pay out less than it insured.
 
There are three major types of plan providers: The
manufacturer, the dealership/third party, and third party
providers. Each one has its assets and liabilities (discussed
ahead).
 
What exactly is covered in an extended service plan? As
mentioned above, whats covered depends on the package
purchased. Some plans only cover the power train: the
mechanical components of the engine, transmission, and
rear-end. Others cover the power train plus some electrical
components. Still others cover electrical, advanced electrical,
and computer components. Some only cover whats listed in the
contract. This is called a Stated or Named contract. This
means that if its not stated, its not covered. Some cover
bumper-to-bumper, similar to a manufacturer warranty, except
trim pieces, upholstery, exterior components, cosmetic items,
and a number of other exclusions.
 
Never before has the adage, The devils in the details, been
so applicable.
 
Manufacturer Extended Plans:
Extended service plans from the manufacturer are the best in
terms of coverage, convenience, and quality. Coverage is
similar to the warranty while the vehicle was under its
original factory warrantywith similar exclusions stated above.
The billing is direct, meaning you dont have to pay
out-of-pocket, except for a deductible, if applicable. Quality
is great too, as an extended warranty from the manufacturer
will only use factory parts. They also have money, so theres
less risk of bankruptcy.
 
The down side of manufacturer extended service plans is that
they are not cheap. These plans are generally the most
expensive, require low mileage standards, and necessitate
servicing your vehicle at a dealer for coverage.
 
Dealership/Third Party Plans:
Extended warranties from a dealership are actually from a third
party insurer. These providers are generally reputable, but
not always. However, if there is an issue (such as the warranty
provider filing chapter 11, which is quite frequent in the
extended service contract business), the dealer may step in
to cover any repairs that would have been covered under the
defunct plan. Also, claims are easier: billing is direct
because the dealership has a working relationship with the
provider, and there is usually agreement on price.
 
Some dealers set up their own internal extended warranty,
which is honored by the selling dealer. This is rare, and
should not be confused with a manufacturer warranty. Important:
extended warranties are often passed off as manufacturer
warranties. Theyre not. This is a sales trick. Also be aware
that there is a significant mark up, as the dealership is
merely acting as the middle man. Lastly, extended warranty
companies often go bankrupt without warning.
 
Third Party Plans:
These plans are called third party plans because they are
outside the responsibility of the manufacturer and the service
center performing the repairs (unless theres a working
relationship with a repair shop as stated above).
 
There are hundreds of extended service contract companies. Some
have good reputations, some dont. Third party plans are
frequently sold by used car dealers. You may also receive an
official looking notification in the mail stating that your
warranty is expiring, and directing you to call an 800 number
ASAP. This is a marketing tactic by an independent warranty
provider. Despite the official appearance of the postcard or
envelope, its not from the manufacturer. Manufacturers do not
send out reminders about warranty expirations.
 
Given the wide-variety of third party plans there are numerous
red flags.
 
1) Claims: Extended warranty companies will be quick to tell
you that filing claims is easy, and that the service center
gets paid immediately via a credit card. Thus, theres no
out-of-pocket expense for you. However, the warranty company
cant dictate a service centers policies. Some service centers
will only accept payment from the repair customer. Thus the
burden is on the repair customer to fill out the forms, contact
their warranty company, and await reimbursement via check, which
can take 2-8 weeks.
 
It is the service centers responsibility to contact the
extended warranty company to let them know whats wrong with
the vehicle and to check coverage. This process can take
anywhere from 20 minutes to 20 days, sometimes more, depending
on the degree of repairs and especially the amount. (See dollars1000
and Adjusters ahead)
 
Service centers and extended warranty companies frequently
battle over the fair price of repairs. Many repair shops no
longer negotiate, and just state the price, leaving the
contract holder (i.e., the service customer) responsible for
the difference.
 
2) Rentals: Rental coverage is a great benefit. However, there
are fixed rates and time limits. In other words, the warranty
company is not going to pay to have you drive a Mercedes-Benz,
even if you drive a Benz. Rental allowances range from dollars25 to
dollars35 per day. Also, rental coverage is based on the number of
hours it takes to repair the vehicle, NOT how long your car has
been at the shop.
 
3) dollars1000 and Adjusters: Repairs that approach dollars1000, or that
require a significant amount of work, will be cause for the
warranty company to call in an adjuster to confirm the
diagnosis. This will delay the repairs by a minimum of 24-48
hours. It may cost you additional money when an adjuster is
involved. You may be charged to have your vehicle pulled back
into the shop for inspection, as well as for the time spent
with the adjuster.
 
4) Tear-down Charges: In many cases, an extended warranty
company will require that a particular component be taken apart
for inspection to determine if the repair is indeed needed and
covered. This puts the service customer in a very awkward
position. The customer will have to authorize potentially
hundreds of dollars of tear-down expense in the hopes that the
repair is covered. If its not, the customer is out the
hundreds in tear-down PLUS the actual repair. This does happen!

Common Myths:
 
1) ""Extended warranties cover maintenance services and brake
work.""
 
No. Extended warranty plans do not cover maintenance or
wearable items. Brake pads and rotors are wearable parts.
Maintenance such as coolant, brake and transmission flushes,
tune-ups, services, oil changes, bulbs, wipers, and more are
not covered.
 
2) ""They told me its bumper-to-bumper, so it covers everything
right?""
 
Wrong. Not even a factory warranty covers everything. When
pitching the sale for the extended warranty, one is very often
lead to believe that he or she will have nothing to worry
about. This is just not true on so many levels. For example, if
your bumper falls off its not covered.
 
3) ""I dont have to pay anything, right?""
 
Wrong. Despite the claims of 100% coverage, there are many
factors involved. The labor rates, labor hours, diagnostic
times, parts prices, and machine work are just a few items that
often conflict with a service centers policies. Some extended
contracts only pay a maximum of dollars55 per hour, and only allow
one half hour for diagnostic time. This is generally
unacceptable to the service center, as labor rates have
skyrocketed to over dollars100 per hour at many dealerships, and
average dollars75 at local shops. Moreover, with the complexity of
todays vehicles, diagnostic time is at a premium. The customer
pays the difference.
 
4) ""If I have an expensive problem, I can just purchase an
extended service contract.""
 
Its unethical, but its an option many attempt. However, most
service contracts have a minimum time requirement before the
first claim can be filed: usually three months. Also, many
contracts require that your vehicle be inspected by a service
center to check for pre-existing conditionsjust like life
insurance.
 
5) ""My contract lasts up to 100,000 miles.""
 
Only if the time limit doesnt run out first. All extended
warranty plans have a time limit. For example, a typical
contract will state that the vehicle is covered for two years
or 100,000 miles, which ever comes first. During the sales
pitch, however, the emphasis will be on the 100,000 miles, not
the time.
 
6) ""If my car breaks, it gets fixed like new.""
Actually, depending on the contract, an extended warranty
company can insist on installing remanufactured or even used
parts.
 
Items commonly not covered by extended warranties:
 Any component with a pre-existing condition
 Any component related to a Technical Service Bulletin (TSB)
 Many components that has been updated by the manufacturer
 Extra components necessary due to manufacturer updates to
complete the repair
 Trim pieces: molding, cup holders, dashboard, console, body
parts, glass
 Many accessories: radios, DVD players, TVs
 Many expensive electronics: climate control units, navigation
assemblies
 
Service contract positives:
Some service contracts are transferable, and may thus increase
the resale value of a vehicle. Many come with trip interruption
reimbursement, towing and 24-hour road side. Some plans can also
be financed, or have E-Z Pay Plans. Others offer a money-back
guarantee.
 
What should you do?
Youll get lots of advice about doing the research, comparing
plans, and reading the fine print. This is all sound advice.
But what about doing the math?
 
Lets say a plan costs dollars2500 for 2 years or 100,000 miles,
whichever comes first. To break even youll need a minimum of
dollars1250 per year in covered repairs, excluding regular
maintenance. Remember covered is the vital word here.
 
Another way to break it down is to anticipate having to pay
dollars104.17 per month over the next two years in covered repairs.
Do you want to take that bet?
 
What could happen?
You could double your money or more in repair work. You could
conceivably get a new engine and transmission (or used ones
anyway). You could also easily spend dollars2500 for a service
contract, and still have to pay another dollars2500 for repairs,
which for a variety of reasons, were not covered under your
plan. Now youre out dollars5000.
 
Alternatively, you could keep the initial dollars2500. In many ways
all an extended warranty does is prepay for repairs. You could
stick the money in the bank and collect interest. Then you
could withdraw the money for repairs as needed.
 
Another consideration thats rarely discussed is the cause of
the problems. Many car repairs problems are the result of wear
and tear, neglected maintenance, physical damage, or acts of
Godsuch as flood damage. None of this is covered. The gamble
only covers failed components.
 
If the vehicle youre driving does cost dollars2500 to dollars4500 in
repairs due to outright failed components, is it a vehicle you
even want to consider keeping? A vehicle that needs this kind
of repair work due to mechanical, electrical, or computer
failures may not be worth it. The dollars2500-dollars4500 would be better
spent on an upgrade to a quality vehicle rather than insuring a
lemon.
 
Theres no question that auto repair is expensive, and even
quality cars break from time to time. But do they breakdown to
the tune of dollars2500-dollars4500? Thats a hefty bet on a possibility.

Terence OHara from the Washington Post makes an excellent
assessment about extended warranties in general. He writes:
 
extended warranties play upon a basic human trait to avoid
loss, even if it means sacrificing a possible future gainthe
gain is all the other things of value that a consumer could buy
with the money that was spent on a warranty
 
Whats the best plan?
Money in your bank account!

About The Author: Theodore P. Olson (Ted) holds extensive
certifications from Mercedes-Benz, Toyota, GM, and ASE. He is
the author of eight books and numerous articles on the
automotive service industry. RepairTrust Fair
http://www.repairtrust.com/