You: Are in-store extended warranties a good idea?

No.

You: Why not?  They seem pretty cheap and they extend the warranty significantly.

Actually, they’re fairly costly and they don’t do much.

You: That’s not what they told me in the store.

I know.

You: So what’s going on?

Good question.  Regardless of how an in-store warranty on a new television, printer, or other gadget is presented, you ultimately face a question about your risk tolerance.

You: My risk tolerance?

Yes. At a very high level, your risk tolerance is how you feel about subjecting yourself to the possible loss of money.  So, in the case of an in-store warranty, you are presented an option of insuring yourself against a possible future dollar loss later due to the damage or breakage of the item you purchase.  But to get this protection, you voluntarily choose to pay an additional cost today (the cost of the warranty).

If you’re more of a “Nervous Nelly” type, you’ll probably highly value the security of the additional coverage and minimize the cost of that protection. Those who are the “All in” types are likely to conclude the exact opposite.

You: What’s the right answer?

While that ultimately depends on your risk tolerance, I believe the overwhelming majority of in-store extended warranties are bad purchases.

You: Why?

First, these warranties are often eagerly sold, and anything that is that eagerly sold should raise a caution. Second, these warranties are among the most highly profitable items for sale at the retailer. They’re so profitable because there is so little cost to them.

You: Little cost to the warranty?

When all is said and done, the retailer selling the warranty has to pay out very little in claims. This is due to the numerous exclusions, the existence of a manufacturer’s warranty, people forgetting they have purchased the extended warranty in the first place and, of course, the realization by many customers two years from now that they don’t feel like paying to pack up and ship a 2 year old printer to some fulfillment center when a new one, which is much better than the one the one that just broke, cost just a few bucks more.

So, in general, I’d say pass on extended or in-store warranties. For more information on in-store warranties, check out one financial journalist’s experience when he was presented the option of an extended warranty for his cell phone.

What do you think about in-store warranties? Have you ever bought one?  DId it pay off?  Other thoughts on the matter?

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