Let's consider two bumper to bumper warranties. The first covers everything on your car except for the standard maintenance items such as oil changes and filters and body work. Which is standard for all extended warranties or service contracts. The second policy will additionally exclude coverage for some emissions components. The first policy costs $2,600 and the second policy with the additional exclusions only costs $2,200. Which is the better value?
Even though the second policy is $400 cheaper, the excluded items are the main reason a check engine light to go on. You will more than likely be paying out of pocket almost three times the amount you saved over the life of the policy. The first more expensive policy ends up being the better value.
Let’s take a look at another type of policy. Two stated component plans. Both cover your air conditioner but one only covers the compressor and is $300 dollars cheaper. There are dozens of other parts to an air conditioning system that will cause it to fail. You might have saved $300 originally but when you have to pay $700 out of pocket for the repair did you really save anything?
A little trick to look out for is one company’s engine coverage might say “all internally lubricated parts within the engine are covered”. Another company might show an impressively long list of 40 engine parts that are covered which would lead you to believe it covers more. In reality the long list of parts are all internally lubricated within the engine and the first policy actually covers them all plus more.
All of these examples are based on a few parts. Apply this to the roughly 10,000 parts on a car and you can see that the cheaper plan might not always be the best value.
When comparing coverage plans from different companies, the least expensive one is not always the best value. There are a handful of extremely good companies who will give you quality coverage for a fair price. And then there are the companies who are notorious for selling inexpensive limited coverage plans dressed up to look like you are getting a lot.
Always focus on the coverage more than the price. Obviously you want to pay as little as possible for a warranty but saving $400, $500 or $600 now may cost you thousands later.
All of the top coverage plans are direct insured. This means the policy is also insured by a third party insurance company and if for some reason the claim is not paid, the insurance company steps in and pays it. This is the most secure type of coverage you can purchase. This insurance adds some cost to the price of the warranty and direct insured policies will always cost a little more.
A lower level of insurance is a risk retention group (RRG). This is basically a group of warranty companies who insure themselves. RRGs are mostly unregulated. These types of warranties are less expensive because they don’t have to pay an independent insurance company. These warranties are much less secure and much less regulated than a direct insured policy.
The lowest level is an uninsured company. Never buy a warranty from a company that is not insured. Most of these companies will try to hide the fact they are uninsured. You can tell an uninsured policy because the contract will not list an insurer or it will say something to the effect of “this policy is backed by the good faith and credit of [warranty company’s name]”. Even though these policies may be very inexpensive, these are the companies you never want to deal with.
Do You Really Need to Pay for Certain Coverage
We see this a lot where someone will pay $800 more for a policy just because it covers the backup camera where the less expensive policy does not. Why pay an additional $800 to cover a repair that costs under $200?
If you really want a particular part covered be realistic about how much the coverage costs versus what it actually costs to repair it.
Coverage at What Cost
Let’s say you have a 2001 Toyota Camry with 120,000 miles on it. Your choices for coverage are a 3 year 36,000 mile stated component plan that will cover all of your major mechanical and electrical systems for $3,400 or a 5 year 100,000 mile powertrain plan for $1,600 that will only cover your engine, transmission, drive axle, starter and air conditioner.
In this case, the higher level of coverage is not worth the price. You could buy another 2001 Camry for $3,400 if something serious happened to yours. The $1,600 powertrain policy would be a better choice giving you 5 years and 100,000 miles of protection for the majorly high priced repairs and limit your exposure in repair costs.
As a general rule is never pay more than half the value of your car for a warranty.
Additional Resources: Not All Extended Warranties are the Same, Choosing the Right Warranty