Nearly every purchase these days comes with a protection plan option, from extending a product warranty to insurance to protect against a change of travel plans. It’s nice to feel safe, but are these protection plans worth the money?

If you listen to Consumer Reports, which notes that extended warranties are a $40 billion per year business, the answer is an emphatic “No.”¹

What to Consider

Protection plans are a big profit source for retailers. They keep 50-70% of the plan’s sticker price, often making them more profitable than the actual product sale.

Protection plans appeal to an individual’s loss aversion bias—a human behavior that perceives a real or potential loss to be worse than an equivalent gain. In other words, a person is more likely to feel pain over having to make a $100 repair than saving $100 on the cost of a protection plan.

To avoid falling prey to these appeals, compare the relative risk of a repair or forced change in travel plans and its attendant cost versus the actual cost of purchasing a protection plan. For instance, 48% of consumers who bought an extended warranty on a new refrigerator did not use it, and the typical warranty costs $6 less than the average out-of-pocket cost of repair.²

To assess these risks and costs, individuals need to answer a number of questions, including:

• What is the likelihood of a product breaking down? Many high-quality brands have a great record for not needing repairs, while “discount” brands may break down more frequently.
• What does the manufacturer’s warranty cover and for how long?
• What does an extended warranty or protection plan cover? Check the fine print—they may contain many exclusions. What are deductibles for those services? Is service in-home? For travel protection plans, ascertain refund eligibility. For example, some travel protection is only good with a doctor’s note or the loss of a job.
• Credit card companies often offer protection on certain purchases, so review their protection coverage and determine what products are covered and to what extent.
• Compare prices of repairs versus the cost of an extended warranty. For instance the average cost of a laptop repair is $125-300, about the same cost as an extended warranty.^{3, 4}

Of course, buying a product from a retailer, like Costco, that offers free extended warranties may be the simplest and smartest way to obtain both comfort against possible repair costs and saving money.

Sources:

1. https://www.consumerreports.org/money/extended-warranties/steer-clear-extended-warranties-a3095935951/
2. https://www.consumerreports.org/appliances/refrigerators/should-you-repair-or-replace-your-broken-refrigerator-a3570195924/
3. https://www.yelp.com/costs/laptop_repair#:~:text=The%20average%20cost%20of%20common,is%20%2450%E2%80%93100%20per%20hour.
4. https://www.realsimple.com/work-life/money/saving/which-tech-warranties-are-worth-it#:~:text=If%20your%20credit%20card%20issuer,these%20options%2C%22%20says%20Brant.

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