Betting to Lose: Why Extended Warranties are a Rip-Off

by Freddy J. Nager, Founder of Atomic Tango LLC + Guaranteed for Life

AppleCare Protection Plan


I’m not much of a gambler, unless you count my dismal dabbling in the stock market. So naturally, I look at any betting offer with skepticism and a deep lack of enthusiasm — even when it comes from my favorite technolust pusher, Apple.

Apple recently sent me an offer to extend the warranty on my MacBook Pro for three years for $349. Like most Apple creations, the pitch was good, using terms like “peace of mind” (in bright red letters at the top) and “protect your investment.” The only things missing were the free drinks as I laid my bet…

The key difference between an extended warranty and Las Vegas gambling is that, in Vegas, you’re betting to win. With an extended warranty and other kinds of insurance, you’re counting on losing. How fun is that?

While Vegas plays on our hopes and dreams, the extended warranty people play on our fears. (I call that pulling a Fox News.) Interestingly, Vegas-style gambling is illegal in California while betting-to-lose warranties and insurance policies are accepted business. And we’re talking BIG business.

According to Warranty Week, The Newsletter for Warranty Management Professionals (there’s one sexy publication for ya):

“Extended warranties generate in the vicinity of $15 billion per year in premiums paid. Not all that money goes to the actual administrators and underwriters of the policies, however. In fact, we’re estimating that roughly half is kept by the actual sellers — the retailers and dealers in the world of warranty.

That’s some tasty dinero (and those are 2005 estimates). Who doesn’t like 50% commissions?

So I’ve got two kinds of advice here:

  1. If you run a business that’s selling big-ticket items, extended warranties are a sweet deal. You can slash your price on the actual product to entice buyers, then make up for that with an extended warranty. You don’t even have to manage the warranty, since plenty of underwriters will deal with all the hassles of servicing warranty buyers.
  2. If you’re a consumer, take your money and bet on something else. Many credit cards already extend your product warranty if you use the card to buy the product. (I use my American Express to buy all my electronics for that reason, and it has saved me on repair costs.) And don’t you have more worthwhile uses for $349?

Still thinking extended warranties? Ask these 6 questions:

First, what’s the “time value” of your money? That $349 you’re giving to Apple now is only the immediate cost — you’ll also lose out on the interest and other earnings from investing that money instead in, say, a stock that pays out dividends. If you’re a savvy investor, you could make even more with that money — perhaps enough to buy a brand new computer.

Second, what if you need the money later on? If you invest your money in a liquid asset instead of a warranty, you’ll have access to it in case of emergencies. But try getting a refund or any resale value for a warranty you’ve already purchased.

Third, what’s the long-term value of the product? Most products lose much of their value the second you open the packaging (or, in the case of a car, the second you drive it off the lot). I spent about $2200 on my MacBook Pro. I see similar used ones on eBay going for $1100, which means that my computer has already lost about half of its value over the past couple of years. Do I want to pay $349 now to insure an $1100 machine? And what’s my MacBook Pro going to be worth by the time this extended warranty expires? Can you imagine what kind of computers Apple will be selling by then? At that point, I won’t even bother repairing my ancient MacBook — I’ll want a new one. (Or I could just buy that used one on eBay.) Instead of buying a warranty, I’ll just save my $349 toward a new computer.

Fourth, what’s the cost of repairs? I recently had another computer repaired for $100. That’s a lot of money, but it’s still less than the cost of an extended warranty. And keep in mind that warranties often don’t cover 100% of the repair cost. Many warranties include deductibles, so be sure to read the fine print. If your deductible is $100 for a repair that’s $100, your warranty is worthless.

Fifth, will your warranty actually cover the damage? Getting companies to take your money is easy; getting them to pay out sometimes takes a lawsuit, as insurance-policy holders in New Orleans discovered after Katrina. Many policies have exclusions for “acts of God,” but if you’re religious, isn’t everything in the universe an “act of God”? In my most recent repair case, the problem was an “act of cat” (fur clogging the fan), and cleaning is not covered by most warranties.

Sixth, what can you afford to lose? I’ve got insurance covering my car, ’cause a major accident or theft would cost far more than I’d be willing to pay, but eventually, my car won’t be worth the extra coverage — I’d rather save the money to buy a new car. Same goes for a house, particularly if you live in earthquake/fire/mudslide/Lindsay Lohan/other natural disasters country, like here in L.A. If your last name isn’t Romney, odds are, you can’t afford to NOT insure your house.

And when it comes to your health, definitely insure that, because it’s priceless and surgery is ridiculously expensive. Plus, many hospitals won’t even admit you without insurance. (The health insurance industry, by the way, is a multi-trillion dollar empire that rivals Mordor in its smoky brooding evil — but that’s a topic for another blog.) So car, house, health, yes. But insuring something like an iPad makes no financial sense, even if you can’t afford to replace it right now.

Sixth, and most importantly, what are the odds of the thing needing repairs? One of the ironies of companies selling extended warranties is that they’re essentially saying, “Hey, you know that $2200 computer we sold you? Well, we didn’t make it all that well. In fact, odds are, it’s gonna blow a gasket within the next three years, costing you over $349 in repairs! So how’d you like some peace of mind?” To which I reply, uh, no, how’d you like a piece of my mind? With some products, particularly those built by a Shenzhen back alley sweatshop, the thing will probably die. Your challenge is to guess the odds of your product incurring repair costs that exceed the warranty price, and to seek out a gambling alternative.

The Right Way to Gamble…

Imagine you bought a new Lexus. It’s well-made, so let’s say the odds are 4-to-1 that you’ll have to repair it after your standard warranty runs out in 4 years or 50,000 miles. Here’s the deal: rather than betting to lose now and waiting to see what happens in four years, why not go to Vegas tomorrow and find a 4-to-1 bet to win?

That way, if you guessed correctly, you’ll actually have something to celebrate. If you can’t make it to Vegas, you can go to the local horse race or buy stock in some company NOW. What’s more likely: your Lexus will cost more to repair than the price of the extended warranty, or shares of Amazon will be priced higher in 2016? They’re both guessing games, but what’s more fun to bet on?

Sometimes It’s a No-Brainer…

Sometimes, you don’t need to go through all five questions to make a decision. When my wife bought her VW Beetle a few years ago, the dealer tried to sell us “rim insurance” in case she hit a man-eating pothole and dented her tire rims. I nearly broke into laughter. My wife and I have been driving for over 50 years combined in such hazardous places as rural Texas and downtown L.A., and neither of us has had a rim destroyed by a man-eating pothole. We didn’t bother investigating what a replacement rim would cost — this is a Beetle, not a bling-bearing Escalade.

If you think rim insurance is silly, when I enrolled in USC for my MBA, the school tried to sell me education insurance. Yes, education insurance. In case I got sick and couldn’t complete the program, I’d be off the hook for my tuition and loans. (Note: This is the exact same MBA program that taught me smart investing and the concept of time value of money. So I think this was a test of my business acumen.) Back then, I was a healthy male in my 30s, and since I don’t participate in cliff diving or bomb defusing, the odds were slim that I’d suffer something debilitating or get pregnant. And from what I’ve seen, universities are pretty flexible in enabling students to resume their educations when they’ve recovered from whatever ails them.

Now isn’t it possible that a computer company or a car dealer or an MBA program truly has your best interests at heart? Aren’t the extended warranties a sign that they really care about your investment, and just want to make sure you’re protected?

Sure it’s possible — but I wouldn’t bet on it.

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Freddy is the Founder & Creative Strategist of Atomic Tango. He also teaches at the University of Southern California (go Trojans!), shoots pool somewhat adequately, and herds cats. Freddy received his BA from Harvard and his MBA from USC.

5 Responses

  1. Speaking as a retailer, we’ve offered these extended warranties on MANY products; ranging from as low as $3 on gaming software, music CD’s and DVD’s, up to hundreds of dollars on hardware (iPods etc). I can tell you that it is EXTREMELY profitable. I wish I could recall the ‘breakage’ figure (number of consumer participants who pay for the warranty but do NOT return to claim against it), but it was a massive %, similar to gift cards before the government stepped in and legislated that outstanding balances could no longer be held on the books as “profit”!

  2. applecare is awesome

    only warranty i would take out

  3. Loved reading the article, just wished to say that it depends on what brand you are buying.

    I have bought a Sony Vaio VGN-SZ57SN some years ago, as it was light and had a very durable battery. It was also over 4000$ and came with 1 year warranty. So I decided to pay extra 7% to get “3 plus” which is an insurance+extended warranty for 3 years from purchase.

    Service center has in warranty period seen it more than I have used it, and the total repair costs (although Sony replaced parts that were not broken, or they really were, this is truly worst laptop ever made) laid onto the insurer were in excess of 7000$.

    Yes, laptop was junk.

    So I agree with the above, but it goes for the reliable products, not for something that won’t last half way through original warranty. Sony, Aiwa, Samsung and Acer kind of ring the bell here… But in case of these, instead of buying warranty, you’d be better off just buying something else.

  4. Excellent article – I still don’t buy the extended warranty on almost anything (though I did for a refurbished pressure washer which has continued to work at peak performance well out of the warranty). I do buy AppleCare, though. I had it for my PowerBook G4, and they replaced the blinking screen about a month before the warranty expired. I bought a Mac Book Pro the next year, and the PowerBook has found new life as a paperweight.

    While I agree with you that charging 35% percent of the computer’s value is way too much to insure it, I purchased the MacBook pro’s extended warranty anyway (I got a discount on it). In the end Freddy, my friend, I think we would both agree that Apple’s signature achievement, above all iPhones, iPads, MacBooks, etc. – is convincing people to buy something they really don’t need.

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