Well, OF COURSE insurance companies take in more money than they pay out.

If they didn't, they'd be called insurance charities.

Normally I would agree, but Ms. TurboWagon got more than her $1500 worth of extended warranty on her car which was a 7/100k package. Basically got a brand new engine out of it.

The biggest tip I love to share is that you don't need to buy an extended factory warranty when you buy the car, at the same dealership, or even the same STATE you buy your car in! In fact, most salesman make more on the warranty than on the car! Look up out of state dealerships online and give them a call, usually they'll be more than happy to give you a quote that you can charge over the phone. Moreover, you won't pay sales tax! IIRC, I was quoted $1600+tax for a 72K,60mo,0 deductable GM MajorGuard new car warranty in 2005. After some googling, I called a dealership in MONTANA recommended on some car club forums, he sold me the same exact GM policy for $950! I had a similar story months later on my wifes Toyota, out-of-state genuine Toyota warranty for almost half the New York dealers price! =)

@TurboWagon: Two words: on average

The trick with these warranties (which *can* really save your tuchus) is to know what the dealer paid for them. You can and SHOULD negotiate the price of these warranties down by as much as 50%, or use them as "throw-ins" during the negotiation process. There is some value in these warranties, ESPECIALLY FOR USED CARS (which come with little to no coverage - your "state" warranty isn't worth the paper it's printed on) and they should not be dismissed out of hand.

The same could be said for any other form of insurance. If I spent $1000 on an extended car warranty and used it to offset $700 out of pocket on repairs over the life of the warranty, I would be pretty happy. Just like I'll be if my wife never collects on my term life insurance policy. Long-term averages only work in aggregate and don't really matter to the individual.

Always shop around. The one thing I would generally say though, is unless the warrenty is a factor/manufacture warrenty, its rarely worth the papper its printed on. If i'm spending the money I want to be able to take it to the dealer, and have them fix it, just like the standard warrenty. Too many horror stories from 3rd parties.

No shit it is "On Average". If the customers on "Average" got more out of it then they put IN to it... the insurance company would go out of business. DUH!

The point of insurance is you are taking a gamble that you will get more out of it than you put in to it. Sometimes you do sometimes you don't. If everybody got MORE out of it than they put in to it NOBODY would SELL it.

Dumb Article. Can't beleive this got posted here. Consumerist is really losing its sense of responsibility here. This isn't something consumers should watch out for. This is more leading consumers to beleive they should not buy extended warranties which is FALSE.

In order for the average to be $700 Average out of $1000 spent that would imply that there are people ABOVE and BELOW $700. and for the "AVERAGE" to be that close to the $1000.00 a lot of people have to be getting more out of it for the numbers to be that high.

Shame on Consumerist for posting this. Extremely BIASED. This article was obviously written to convey the opinion of the writer. The data was displayed in a fashion to prove that point.

How about instead of using a USELESS number such as the "Average"... lets use a number like the PERCENTAGE of people who got MORE than what they put into it and then the AVERAGE amount OVER what they paid? Woudn't that put a different spin on this research.

Spin Doctors...

I work in the service side of the business and I see the benefit of purchasing a service contract everyday. The only problems we ever see with them is when customers purchase "aftermarket" or non OEM policies. Many times these companies make it hard to collect on a claim, or worse go bankrupt because they sold too many "discounted" policies. Service contracts are NOT for everyone. But with the increase quality of all products, repair cost have increased as well. Also all manufactures have extended both basic and drivetrain warranties longer than ever before. To label service contracts as "ripoffs" is frankly, unfair. Yes dealers push them as a profit item, as every business does for almost any retail purchase.

@TurboWagon: What kinda of turbo wagon? Volvo maybe?

anyway my mom has an extended warranty, and every time she takes it in they don't see a problem. There was a nice CLUNK when accelerating, 3 or 4 times she took it back to the dealer before they found the cross member bolts were lose!!!

Last used car I got, i didn't get a warranty. And then the engine died after 3 months. And then the transmission died 2 months after that (both externally invisible faults, too - the mechanic who sold me the car could not have known they were going to fail, I had this confirmed by several other mechanics). The same mechanic sold me my new (er) car - and threw in a 6 mo warranty for free. I'm never buying an american car again.

I had an extended warranty on my 2000 VW which easily paid for itself. My warranty went from a 3yr/36k warranty to a 5yr/60k warranty with a $200 deductible for only $350. It was supposed to be $500, but I actually got a lower rate on my loan for getting it. After having some recurring electrical problems that were fixed with quick, but pricey repairs, I easily made up for it in the 4th year of owning my car. Also, you have to make the most of it if it has a deductible, get EVERYTHING fixed at once. I easily saved $500 after the warranty paid for itself.

On the other hand, with my new Audi, I have a 4yr/50k (or maybe 5 year... I don't care since I'll hit the mileage first). and an extended warranty was like $2500. Yowzah! I said thanks, but no thanks. Biggest thing to do is to document any issues you have and make sure that you inform the dealer of it so that they can put it on your service records. That way if you say that xyz is wrong at 48k and you want them to fix something, but they say it's OK, but then breaks at 51k outside of your warranty, you can fight them to honor it since it was an issue that came up within the warranty.

To rewrite the summary:

Most consumers spend more on life insurance than their families get back in payouts. "Life insurance companies sell costly 'peace of mind' for nightmares that probably won't occur," said some expert. "Insurance companies know when people tend to die, and in most cases consumers are betting against the house." The only one with a peace of mind is the salesman as he tallies up his commissions.
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Buying a reduction in individual risk can be perfectly rational; it's why we have ANY insurance: fire insurance, flood insurance, etc. It's rational for companies to sell that risk reduction because they're aggregating the risk across many people, as well as taking a profit.

In this case, they may also be buying repair services at (roughly speaking) wholesale prices rather than retail, which an individual car owner would have to pay.

The only issue is the efficiency of the market. If it's inefficient because of poor information or because the barriers to entry are high (which is likely to be the case if it's controlled by dealers), then prices will tend to be higher than they should be.

We certainly got less money out of our warranty (on a used car) than we put into it, but we count ourselves lucky to have gotten ANY money out of it, since the insurance/warranty company went bankrupt when our policy was half-over.

Our dealer still honored the policy, however, and we were able to get a few annoying problems dealt with before the warranty expired.

We won! Got an extended warranty on a Ford Winstar. The thing dropped two transmissions under extended warranty. Woot!

Years ago, I bought an extended warranty from Hyundai that covered me for 10 years from time of purchase. Eight years into owning the car, my head gasket went. The repair bill came to $1800 and I'd paid $800 for the warranty. Six months later, the speedometer went. $200 worth of work and I didn't pay a penny.

I've had great luck with extended warranties on both of my cars. I think it comes down the car make and area where you live. Colder northern winters play hell on cars.

@sp00nix: This reminds me of a suggestion I've heard on Car Talk a number of times. If you have a car problem and the dealer won't address it, take the car to an independent mechanic and have them diagnose the problem and give you a quote. You'll probably have to pay for the diagnosis, but it shouldn't be that much. Then take that information and present it to the dealership.

@fredmertz: Exactly, I'd be happy too if I got $700 worth out of my $1000 policy. Actually I just bought one for $2500 (6yr 100K) for the used car I just got. I don't think I'd ever get a used car without one.

"Most consumers spend more on extended warranties than they get back in repair savings"

Of course...if that wasn't the case, it would be a losing business offering.

Bought a nice car, no warranty at all. No problems either, ended up selling it and bought a 4x4 pickup about 6 months later. No warranty on that either, and no problems. Just lucky, I guess.

I would recommend the extended warranty if the automobile you are purchasing is the first year model or has a dramatic mechanical change from the prior years model.

My ex-wife purchased an extended warranty on a first year Dodge Neon - 1995. This paid for itself and then some- multiple engine software flashes (and troubleshooting included new plugs/plug wires), a replacement manual transmission, a replacement head gasket (until Dodge figured out to change the head gasket design) etc. They definitely lost money on that car.

That said I had a Dakota at the end of its design cycle (1996) which had a radio and replacement catalytic convertor paid for by warranty (the converter would later be recalled but my truck didn't qualify) yet the fuel pump went out at 77k for a $550 charge...

So if the vehicle is an entirely new model - recommended.

When I bought by car (my very first brand new car - a 2002 Hyundai Elantra), I got the B2B warranty extended to 10Y/100K with no deductable through the factory. I think it cost me about $1000-1200. So far I haven't needed to call on it, but knowing that it was there (especially back when I first got it, before I got my finances in order) was a major comfort.

Having reliable transportation that should be able to keep going without major expense for the forseeable future, short of getting totalled in a collision, is a good thing.

Not only is this article useless, it doesn't even have its facts straight. A salesperson does not make money on a warranty, rust, tire extended protection. At most, if not all dealerships, the F&I department or finance manager makes the money on those products. Its been that way at every dealer I have worked at.

Motorcycles too!!
Happened to me. I bought a used Kawasaki (motorcycle) and it turned out that the gas tank had a puncture so small that it would only leak gasoline when the motor was one & the tank pressurized. I had bought the extended warranty, but guess what, it didn't cover the fuel tank. Sorry, too bad! I had to either fork over $500 for a new tank shipped from Japan OR learn to live with gasoline dripping on my leg every day.

@coaster.n3rd: Well a lot of dealerships have dumped the FI guy and the original salesmen does everything. I know carmax back in the day (latter half of the 90s) paid $150 on the car and $100 on the warranty.

That said, they are well worth it. I would rather pay the $1k and only get back $500 for the piece of mind of not winding up without a car two years later due to a more expensive repair. If you finance you should always consider a warranty that covers the entire loan term.

But dont ever, EVER, take a third party warranty. If you cant get a manufacturer warranty, or maybe a dealer (if its an established chain) then its not worth the paper its written on.

Those companies that mail you ads to get an extended warranty are scams. Same if the dealer doesnt provide their own, and uses a third party. They are worthless (talking to you Eagle Warranty). I actually got a call last night offering me a warranty on my 10 year old extra car with 150k on it. Why would any honest company warranty a car like that?

On my lease vehicle, I extend the bumper-to-bumper warranty to 45,000 miles and roll it into the monthly payment. That way, I'm covered under warranty for the duration of my contract. If something breaks between 36,000 miles and 45,000 miles, it's not my problem. It's not that expensive, and I prefer to just not worry about these things.

I dont have a warranty on my extended car, is that a problem?

All I can say is DUH! Sears tried to sell me an extended warranty on my new LG washer. They told me it came with only a 1 yr from the manufacturer. I printed LG's warranty out and took it to them and called them on their lie. Certain parts of the washer are covered by LG for 1, 3, 7 and lifetime of the washer. LG has the best manufacturer warranty. Most are only 1 yr.

@barfoo: That would be a good comparison if health insurance weren't necessary for receiving health care in this country. Just try to walk into a doctor's office and say that you don't have insurance but you'll pay cash. Probably 90% of doctors will turn you down.

One other thing to consider, since car payments are now going out 7 years, it's not a bad idea to protect your INVESTMENT in the vehicle. Service contracts are generaly not used until the last 25% of the policy coverage. Also people are driving more than ever before and many times they will exceed the factory coverage BEFORE the vehicle is even paid off. I have seen horror stories of people having to "walk away" from a vehicle because they could not afford to fix it, and they still owed money on it.

@samurailynn: are you kidding? Doctors LOVE cash payment. Considering insurance makes them cut their rates in order to accept reimbursement they would prefer that everyone paid cash.

@samurailynn: Fire insurance is probably a closer analogy. There are lots of companies willing to rebuild your house for cash.

Both of my current vehicles were slightly used Fords... with a good remainder of factory warranty and then the Ford Certified warranty (6 years/100K on the drivetrain). Thrown in for free. Oh, and the car just happened to have originally been sold in California so it has a PZEV (partial zero emissions vehicle--nods to all of you treehuggers). By law, those vehicles need to have a 15 year 150K warranty on the emission-control components.... so I have a good long time of worrying about getting stiffed with a large repair bill if I fail the silly Texas emissions test.

Couple that with the fact that when I bought our last car last week, the dealer lowballed me on my trade, I turned around and lowballed him on the offer, and a distracted sales manager misread the offer sheet and accepted it.... and was most of the way through the paperwork before realizing it.... I got a tremendous deal.

Well, I'm one person that can attest that I got MORE out of my extended warranty than I paid for it. Paid $1,240 for it and ended up having a $3000 front-end repair, engine gasket repairs, and something else - I can't remember.

The trick was to get it DIRECTLY from the warranty company and NOT the dealer. Dealer wanted to charge me over $4K for a warranty that wasn't as good as the one I paid $1,240 for. Got mine from Phoenix American in Florida. AWESOME!

My wife drives 25K miles a year. Previous car died on Christmas Day. It needed a 20 dollar part but 700 bucks worth of labor, to remove the engine. (engine seal)

When we bought a new car, the dealer warranty was prohibitively expensive, but I negotiated the price down because I showed them third party warranty deals. In the end, the dealer warranty was comprable to the third party.

We're planning to keep the car for the long haul, so having piece of mind for five years is better than being hit with an 800 dollar repair bill. It's a couple extra dollars a month, but I got such a great deal on the car (well below invoice leftover) I'm not complaining.

We didn't get one on my wife's Windstar, and as soon as it was out of warranty, the transmission blew.

We didn't get one on my 08 Scion xB, but decided instead of just baby it and so ALL the scheduled maintenance.

We feel like by purchasing a better brand and taking routine maintenance seriously, we'll be better off in the long run.

@MartyF81:

Wow, lots of hostility there.

If we did do the analysis you suggest (what % of people get more out than they put in, rather than the average amount of their investment), it would look even less attractive to get the insurance policy, since I would be the analysis works out to be a small number of payouts of very large $ value (like the guy above who got a new engine) and a large majority the people who get minimal or nothing back.

@samurailynn:

99% of doctors will happily treat you. You're much more likely to find a doctor who will ONLY take cash than one who won't take cash.

NOTE ABOUT AFTERMARKET WARRANTIES: Uncle Al's Ye Olde Warranty is probably crap, but if a major company (example: GE) underwrites a warranty, it can often be superior to an OEM warranty. With the aftermarket, you're not as restricted in terms of which dealer you use (you don't have to use a dealer who sells the same brand as your car).

I beg to differ. Vehemently.

I had an extended warranty on my 2000 323i wagon, and one day my sunroof broke--well after the bmw warranty was up, but I had my Warranty Direct extended warranty for $2500 or something. The sunroof repair cost $3300. And I didn't pay a cent.

Depending on the extended warranty and the car, I think they really can be worth the price. I suppose it also depends on how much of your car you want to work perfectly.

Extended warranty, credit life and disability insurance (known as "croak and choke" in the auto finance world), tire warranties, rust protection, etc. etc. are all sold by the dealership because they are money makers, big money makers. Dealers don't make any real money any more by actually selling the cars due to the competitive nature of the new car business, the ability to buy or at least shop for (and price) cars on-line, and factory rebate and the occasional special interest rate programs. Dealers make their money on the above-mentioned finance contract add-ons, the interest rate difference between their buy rate from the bank/factory finance company (GMAC, FMC, etc.) and what they charge the buyer, and from the "back room" operations in the parts department, service department and body shop/reconditioning department. Yes, the F & I guy makes his commission off the contract add-ons just as the salesman gets the sales commission but the dealer himself sees most of those profits.

I have a 2001 Audi. When the warranty ran out, I picked up an extended warranty for $1600.

Later, despite correct maintenance, the timing belt slipped enough that it required a new engine. The warranty covered the whole cost, which was well over $5,000 by the time we were done.

Car warranties are like any other insurance: if you are more able to afford the cost of insurance than you are able to afford something going wrong, it's not a horrible idea to at least price it out.

so - when i bought my car i bought into the warranty simply because they dropped my loan percentage by 2% if i signed on. that said, i saved 500 in the long run by buying into it.

Free Warranty: don't buy domestic.

@B: See, now that's just a bunch of crap. No matter who pays for work - whether the customer or a service policy, the dealer gets paid for diagnosing and repairing a vehicle. Last time I knew, a car dealer's goal was to cover the entire operating cost of a dealership in parts and service. Whatever gross profit they make at the front of the building is just that - gross profit. That business model doesn't work if the service department "doesn't want" to fix cars.

Agreed. This needs to be removed.

Of course insurance companies pay out less than they rake in. Id say that a 7/10 ratio is actually pretty good.

@rewinditback: That practice is illegal - if the dealer actually told you they'd lower your interest rate if you included the service contract. You were entitled to the lower rate without purchasing the contract. If it happened recently, I'd go back and cancel the policy, and have that amount refunded to my lender.

There is no right or wrong answer here. I repeat: there is no right or wrong answer here.

This debate all boils down to the concept of "risk aversion". It's an academic argument that states that you are willing to pay a premium beyond your expected loss in order to transfer risk in exchange for a certain outcome. This is why the insurance industry exists for the individual market and why they can make a profit. In this case, you transfer your risk financial loss from breakdown to the warranty issuer for $x and, assuming no deductible, you know if y or z happens in w years, you've paid $x. Similarly, if nothing happens, you still paid $x. The uncertainty is gone.

By definition, you are risk averse if you:
A.) Believe more money is better than less money; and,
B.) Exhibit decreasing marginal utility of wealth (e.g., If I had as much money as Bill Gates has, I would be less likely to stop and pick up a quarter on the sidewalk as I am now.)

Risk aversion varies by individual. Therefore, some people are so risk averse that they are willing to pay 100% more than what they could expect to lose. Those people would buy an extended warranty that they dealer sells for double its cost (assuming the manufacturer is selling them at cost.)

Other people are barely willing to pay beyond expected losses. They are less risk averse.

So "rip-off" is unequivocally in the eye of the beholder.

Coming from an ex-dealership employee-

Many commentors have pointed this out: its like all insurance. You are paying to reduce personal risk. It is either worth it to you or not.

Its very important to price these things out with the dealer. There is a very large markup on this stuff; probably somewhere in the 200% range. You can bargain them down and they'll be happy to sell it to you for cheaper; they are still making money. The warranty company (probably the brand themselves) offers the dealer volume discounts too; they need to sell as many as possible.

As another couple commentors have pointed out, you can shop around for these too. You don't necessarily have to buy it at the time of sale from that dealer.

It is also vitally important that you keep maintenance records. I can't stress this enough... a very good example of how this can go wrong is the "lifetime powertrain warranty" that Chrysler is currently pushing. The fine print states that you have to religiously maintain the vehicle and keep all records; essentially getting frequent (3-4000 mile) oil changes at offical Chrysler dealers (this more than makes up for the cost of any future repairs.

In short - bargain them down and take it. The 'insurance' is worth it.

@SaveMeJeebus: free advice: Don't live in the past. The quality gap between domestic and Japanese cars is increasingly one of perception. At least Ford and GM are making vastly better cars than they did a decade ago, because they're faced with extinction if they don't.

While that perception gap exists, there'll be deals to be had, and domestic manufacturers are increasing their included warranties. If I needed a midsize transportation unit, I'd buy a Malibu before a Camry right now.

@SacraBos: Ahh, yes, the infamous AXOD/E. An absolutely wonderful piece of engineering, if you happen to run a transmission repair shop.

@joemama321:

That was an informed, thoughtful post. You're clearly on the wrong website. :)

As with most purchases, your mileage may vary. The first waste that LOTS of people get caught by is that they buy the extended warranty and then succumb to some salesman's siren song for a new car before their initial manufacturer's warranty runs out. If you're addicted to new cars and buy a new one every 3 years or so, you'll never make an extended warranty pay.

Another issue is buying into the dealership hype. Either research the available warranties on your own BEFORE you subject yourself to their sales pitches, or just buy the car and research the warranty later. I realize that the problem with this approach is that many people can't afford the car in the first place, so the only way they're going to get an extended warranty is on credit, and it's easier for them to roll