(Newswire.net — December 29, 2013) —
Retailers and manufacturers are in the business of making a profit, not necessarily offering a fair or equitable deal. So what is a consumer to do? The honest answer is: It depends. Impulse buying can sometimes be accompanied by impulse fears that are planted in our subconscious by aggressive salespeople that suddenly paint a Draconian scenario in our minds about that major purchase that we just made and the negative events that can or might occur in order to take that item away from us or cease its useful or beneficial life.
First of all, we need to know what the original warranty covers and for what period of time. Generally speaking, this warranty should be sufficient for what we are buying. We also must look at what is the average useful life for what this item was intended and what period of time constitutes its obsolescence as it depreciates. There is also a direct correlation between the cost of the warranty and its replacement value. As a rule of thumb, anything in excess of 20% of its replacement value is excessive.
Secondly, if we looked at the historical behavior of the product’s life through normal usage and the likelihood of breakage or theft, we must then determine if the language of the warranty satisfies the scenarios that can occur. Mobile phones are an example of good warranties where theft or screen breakage can easily occur. With these a monthly recurring plans for approximately $5.00, they allow the phone owner to protect the unforeseen loss or damage due to falling on the ground. Mobile phones held by adolescents and children in our lives need these types of warranties. These are frequent occurrences along with larger phones and larger glass screens, where there is more to break and less that can be protected.
Sales incentives drive much of the unnecessary warranty industry in that the likely exercise of a claim on these contracts is rare. Insurance companies therefore offer lucrative compensation percentages to the salespeople while still having enough financial reserves to cover whatever claims might be filed.
There are however circumstances where extended warranties make a lot of sense such as in the case of a second hand or used car. Here, the dependency upon a vehicle is crucial for a livelihood and day to day living while an auto breakdown can cause a major financial set back. A used vehicle also has the element of unknown that one cannot determine what and when an event will happen, however with the cost of a used vehicle being cheaper, the unknown wear and tear are the wild card that one must gamble with as the car owner. Thus repair expenses must be allotted for.
The purchase of new cars can also attach an extended warranty which is a bit counter intuitive. If an auto has a 3 year warranty from the manufacturer or 36,000 miles, then the purchase at that point in time might make financial sense depending upon what coverage one seeks. It is important to understand how insurance policies are priced. They are essentially in the business of forecasting and betting on an event happening or not. They make it their business to study the probability of these occurrences actually happening and then play the odds. There is also a relationship between the time vale of money and when an insurance contract might be invoked. If an insurance company or warranty company can collect their fees early enough and have time to make their investments, they can play the probability curve to determine what the cash flow needs will be based on historical statistics.
Life insurance is a bet on actuarial tables for life expectancy, while property and casualty insurance bets on accidents involving property and life or medical claims. Extended warranties are more akin to property and casualty policies since they are based on human accidents or behavior that affect their claims occurrence.
Mercury Insurance is one of the extended warranty providers that specialize in this industry of warranty claims. Peace of mind may be the primary motive where most warranty purchasers participate, but in certain instances, these actually represent an investment in their purchase. Window warranties from Home Depot is cited as an excellent example of a good warranty in a product that can be costly to replace and likely to occur. There have been a few case studies in the news that have shown this decision to be financially prudent.
Homeowner’s insurance is mandatory by bank lenders in order to protect their investment commitment for the capital that has been outlaid on a mortgage. Perhaps if financing were available for computers and home appliances would mandatory warranties also be required there?
As the economy continues to struggle and incomes sputter along, warranty contracts may become more mainstream in our lives as contingent liabilities pose to be potential risks and problems that can put a damper on our savings if not careful. The emotional pull of these at the time of purchase is probably the most compelling reason that most policies are sold. Without the hard pressed sales pitch, the question is “Would these be purchased at the volume that they are?” Clearly the answer is ”No”, which then leads one to ask, whether these policies are ever used or just stored away in a file cabinet to provide some comfort? The next question then should be “Should the warranty provider be a renowned name and / or manufacturer or would a lesser third party provider that offers a better price be a better choice?”
There are two main points raised here and that is reliability versus price. If a company is no longer in business or under capitalized, the warranty premiums might be a waste of money resulting in a useless expenditure. A large name brand insurer or manufacturer on the flip side has deeper pockets to sustain downturns and economic cycles. They probably have a subsidiary company that has its own balance sheet to reserve for claims that would be filed. So you might be paying a premium for reliability in warranty name alone. There are third parties that align themselves with deep pocketed insurers that offer a more custom approach for consumers to be able to answer questions without the hard sell, while also providing a reliable insurer for claims paying ability. Warranty Contracts is a national third party extended warranty or vehicle service contract provider that acts in that very capacity. They are more consultant than sales staff yet will make the sale if and when consumers request one. It is a more custom way of providing a well needed service with a “kindler and gentler” feel that does not make the consumer feel uncomfortable at any time.
The other category sometimes overlooked is also the notorious deductible. Deductibles are that amount that is reduced off the top of a claim when filed and paid. There is generally a formula that correlates to the premium of the warranty contract that is paid upfront or over time. The higher the deductible, the lower the premium. This is one way that consumers can pay less for the warranty yet still preserve the contractual right to a warranty when needed. After all, a warranty should be utilized if and when a major accident or set back takes place, not just for a petty incident. Homeowner’s insurance that covers “comprehensive” coverage is an example of the inverse relationship to premium payments and deductibles. If there is a Picasso painting in the house, one would want this valuable collectible insured for theft, but would this homeowner want to file an insurance claim for losing a garden rake in their garage?
In a recent article of U.S. News dated December 20th, 2013, Rajiv Sinha, marketing professor at the W.P. Carey School of Business at Arizona State University, says that “…it usually doesn’t make sense to buy an extended warranty….” however “…with the increased risk involved for used car shoppers, getting an extended warranty is usually a smart financial move.” The SCIC, Service Contract Industry Council offers most of the service contracts available in the industry. They also amalgamate facts and figures associated for prospective buyers and might be able to furnish valuable statistics that can be critical in analyzing the decision of when or if a, extended warranty is a good idea.
Contact:
Warranty Contracts
866-477-6008
www.extendedwarrantyforcars.net