Ask Stacy: Are Service Plans and Extended Warranties Worth It?

Over the 25 years I’ve been doing consumer news, I’ve done several stories about extended warranties and service contracts. They’ve mostly been negative.

My opinion has always been these add-ons are merely profit centers for retailers and rarely worth the money.

Recently, however, I began questioning that advice, not because the service contracts are better, but because some products they protect are getting worse.

Here’s a look at this week’s reader question.

Are extended service plans for washing machines and dryers worth the investment? We bought a new Maytag electric dryer six months ago, and now we are receiving mailings about buying a service plan to “protect our investment.” — Kathy

Before we delve into this topic, here’s a related Money Talks TV news story. It’s about those warranties you see advertised that are supposed to cover all the major components of your home.

Now let’s address extended warranties and service plans.

Are service plans worth it?

We’ve all been there: You’re at the checkout buying anything from a cellphone to a dishwasher, and the salesperson launches into a new pitch. “Don’t you want an extended warranty/service plan to protect you from expensive repairs?”

There’s a reason these pitches are so intense. These post-sale policies come with markups of 50 percent or more, typically a much higher profit margin than the retailer makes from the product itself. That profit margin alone should tell you something — namely, lots more money is being taken in by warranty companies than they’re paying out for repairs.

That’s one reason to just say no: The odds aren’t in your favor. Other reasons:

• You may be getting duplicate coverage. Most products come with a manufacturer’s warranty. You may be paying twice for the same coverage.
• Products don’t break during the warranty period. Everything’s going to break eventually, but according to reliable sources like Consumer Reports, it’s more often when the product is outside the time frame covered by the service plan.
• Repairs might be cheaper than the service plan. If fixing the problem is less than the cost of the service plan, even when you “win” by having the plan, you still lose.
• You might have coverage elsewhere. Pay for your purchase with some credit cards, and you’ll get a free, automatic extension of the manufacturer’s warranty. Did you check before you bought?

They don’t make ’em like they used to

My parents bought a GE refrigerator in 1973. If memory serves, they kept that refrigerator for at least 25 years, and it needed few, if any, repairs.

I bought a GE refrigerator 10 years ago. I’ve had a repairman out here twice because it stopped working entirely, and I’ve replaced the ice maker twice myself.

Why the difference in quality? In a word, computers. Central air conditioners, washers, dryers and refrigerators are all examples of appliances that used to be all mechanical, but now contain circuit boards.

Here’s the formula: Delicate electronics + moisture + heat = more frequent repairs.

This isn’t just my theory. I interviewed an appliance and an air-conditioning repair guy, both with 25-plus years of experience, and both independently said the same thing: They really don’t make them like they used to. Both men cited cheap, Chinese manufacturing and electronic components as the primary reasons.

Coincidentally, both said the products they respectively service, refrigerators and central air conditioners, used to last decades and now last about five years before needing repair.

To rub a little salt in the wound, the circuit boards used in these products virtually ensure it will take longer to get your A/C or fridge up and running. When things were mechanical, your service guy likely had the necessary parts on his truck. Now, since he can’t possibly carry around every potential circuit board, he has to order one, pick it up, then make another trip to install it.

I did a story about all this a couple of years ago. See “Why Modern Appliances Don’t Last.”

So, should you spring for protection?

Despite the fact that some of today’s products aren’t as good as yesterday’s, in most cases you still shouldn’t pay for extended protection for the reasons cited above.

Like most things in life, however, it’s not black and white. Additional things to consider:

The product: Some products fail more often than others. Consumer Reports does an annual survey and offers repair rates reported by consumers on everything from appliances to electronics. The differences among brands and types can be dramatic. For example, according to CR, for top-freezer refrigerators with ice-makers (like my parents had), from 14 percent (Maytag) to 27 percent (GE) needed repair. With a side-by-side (which I have) from 32 percent (Frigidaire) to 40 percent (KitchenAid) needed repair.

The more likely a product is to fail, the more valuable the extended service plan. However, a plan covering something more likely to break will probably cost more as well. So the best idea is to do this type of research before shopping, avoid products with higher failure rates, then skip the service contract.

Who’s using it and how: Giving a computer to a 5-year-old, or someone who acts like one, is much riskier than giving one to someone responsible. A computer that sits on your desk is less likely to need repairs than a tablet you take to the beach.

The cost: Don’t even think of buying an extended-service contract or warranty without researching prices beforehand. If you have the right credit card, you might get additional protection free. You might also find it cheaper from another retailer. And if you’re getting the hard-sell months after the purchase, like the reader who sent in this week’s question, be especially careful.

The details: You need to read the fine print to see what’s covered and what isn’t. Do you have to pay to send it off for repairs? Are you paying for coverage that overlaps with the manufacturer’s warranty? Does your homeowners coverage offer some of the same protections? Does the company have a spotty record when it comes to paying claims? What happens if the warranty company goes belly up?

In short, never impulsively buy this type of protection at the point of purchase, or thereafter. Understand what you’re buying before you buy it.

Got a question you’d like answered?

You can ask a question simply by hitting “reply” to our email newsletter. If you’re not subscribed, fix that right now by clicking here.

The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. I’ve been investing in both stocks and real estate for more than 35 years.

Got some time to kill? You can learn more about me here.

Want to weigh in with some thoughts on this topic? Share with us in comments below or on our Facebook page.

Got more money questions? Browse lots more Ask Stacy answers here.