Extended Warranty 101

All you ever wanted to know about extended warranties but were afraid to ask…
In buying an extended warranty, as in so many other aspects of life, it's important to be fully informed before making your purchase. Before committing to a warranty and a warranty company, take the time to fully explore the ins and outs of the various coverages. Many coverages look similar; you should request copies of every contract you are considering, and then compare them to determine what best fits your needs. If a warranty seller will not let you see this before you buy then you should look elsewhere.

Here are some questions you should have answered before purchasing your warranty:

Do I really need an Extended Warranty?
There are many reasons to purchase an extended warranty. Your vehicle is one of your biggest investments. An extended warranty will insure it is always in the best mechanical condition. With the complexity of today's vehicles, one major repair often costs more than the extended warranty. Hourly labor rates can top $90 per hour in some markets.

Many warranties are transferable and will increase the resale value to potential buyers. Who wouldn't want to own a vehicle that comes protected from repair bills.

Who is really behind the warranty that you're considering?
An extended warranty may be backed by a third-party warranty company or by the vehicle's manufacturer. Knowing who will be administering your policy can give you insight into the strengths and weaknesses of the contract you're considering. Administrators act as claims adjusters, authorizing the payment of claims to the service repair facility under the contract. Manufacturer-backed warranties score very highly when it comes to ease of use. However, third-party warranties are often less expensive and offer broader coverage. If you decide to purchase a third-party warranty, make sure they have the financial resources to meet their obligations under your contract. After all, the ultimate measure of a warranty company is ensuring that your claims are paid quickly and easily.

There are many web sites offering warranties today. Prices vary considerably as do coverages. Only a couple of web sites are direct administrators of the warranties. Remember, it is the administrator (the company that pays your claims) of the warranty that you should thoroughly investigate.

Is the contract underwritten by an insurance company?
Some states require a service contract to be underwritten by an insurance company. Find out if the primary insurer of the contract has been rated by A.M. Best, the most respected company offering ratings on insurance companies (www.ambest.com). This will give you an indication as to its ability to pay your claim should the administrator go out of business.

What is the nature of the deductible?
Fully investigate a policy's deductible before signing on the dotted line. Consider not only its amount, but also whether it's per visit or per repair. With a per visit deductible, each visit to the shop will run you a fixed amount, regardless of how many parts are repaired; a per repair deductible applies to each serviced part. What sounds like a minor difference could have a major impact on your wallet.

Is the warranty transferable?
Some warranties end when the person who bought the warranty sells the car. A warranty that allows you to transfer it to a new buyer is preferable; it's also an excellent selling point for prospective buyers when you decide to sell your car.

Can repairs be performed at any repair shop?
Some warranties require that repairs be performed at the dealership from which the warranty was purchased; this can be limiting and inconvenient. You want to look for a warranty that gives you more than one service facility to choose from. You'll appreciate this if the vehicle ever need service while you're on a road trip, miles away from home.

What exactly is covered?
Know what's covered -- and what's not covered -- by the warranty you're considering. Does the contract cover breakdown as well as wear and tear? Under a "breakdown" warranty, coverage is extended only to parts that break. Not all parts fail due to breakage; some need to be replaced because they've worn down over a period of time. A "wear-and-tear" warranty extends coverage to worn-down parts in need of replacement.

Additionally, some "entry level" contracts don't cover ABS brakes and many of the luxury options common in today's vehicles, so if your vehicle has this feature, you should consider upgrading to a higher level of coverage. And overheating -- regardless of its cause -- isn't covered in many warranties. Thus, if overheating occurred due to problems with an expensive part such as your radiator, you'd be stuck with a hefty repair bill.

Is a cash layout required for repairs?
Some warranties require that you pay the bill, then send the receipt in and wait for reimbursement; in many cases, months elapse before you get your money back. Ideally, you'll want a warranty that pays the service repair facility directly with a credit card immediately upon completion of the repairs.

What is the term of the warranty?
Some warranties have terms that start from the original in-service date (the original purchase date) of your car. This is a sales tactic that companies use to make the contracts appear to have a longer coverage term. If you purchase a warranty that begins the day you buy it, the date of expiration will be clearly defined.

In addition, you should check the contract to see if there is a waiting period before you can use your extended warranty. Some companies have waiting periods as long as 30-60 days.

Why buy it now? I'm still covered by the manufacturer.
Your warranty is less expensive the earlier you purchase it. The warranty your vehicle came with is factored into the cost, the more warranty you have remaining, the lower your cost. If you buy a 100,000 mile plan today or in 2 years, it will still expire at 100,000 miles. The more miles or time left on your factory warranty, the less expensive the extension costs. As the vehicle ages and accrues mileage, the price for protection rises. This is similar to how life insurance works.

The length of the warranty you can buy lessens with the vehicles age. Prices may also rise due to increasing labor and parts prices. Buying now will lock into today's low prices and protect yourself from tomorrow's rising repair rates. Extended warranties are not duplicate coverage, they merely extend your manufacturer's warranty.