Do You Need an Extended Warranty for Your New Gadget? Do the Math, Says Square Trade

Do You Need an Extended Warranty? Do the Math, Says SquareTrade

Consumer Reports, the nation’s most respected source of product reviews and buying advice, does not mince words about extended warranties. It calls them a bad idea and money down the drain. The website Consumerist agrees, calling extended warranties useless and usually a bad deal.

So why on earth would you consider shelling out an extra $50 to $150 for a couple of extra years of warranty coverage on your new appliance, computer, or mobile gadget?

Well, dear reader, try to suspend your cynicism for a moment while I tell you about a 200-employee company in San Francisco called SquareTrade, which works with bricks-and-mortar chains like Costco and TigerDirect and e-retailers like Amazon, eBay, and Buy.com to offer protection plans for laptops, smartphones, tablets, and other electronics.

Steve Abernethy, the company’s energetic CEO, says he’s well aware of the extended-warranty industry’s dreadful reputation. But he thinks SquareTrade has a shot at salvaging it, mainly by offering broader coverage and better service at lower prices.

He also has some interesting thoughts about the physical and financial risks we’re taking as we become ever more inseparable from our smartphones and tablets. Sure, the chances that your new Frigidaire will conk out within the warranty period may be tiny. But what about that $700 chunk of glass and integrated circuits that you’re carrying in your pocket? How sure are you that you can go three years without accidentally sitting on it or dropping it in the toilet? (It happens more often than you might think.)

I’m not saying SquareTrade has won me over, and I haven’t bought extended warranties for any of my own devices. But I’ll say this: I went into a recent interview with Abernethy as a hardened warranty skeptic. I came out thinking that the industry might be changing, and that buying an extended warranty might be a good idea for some people.

Steve Abernethy, co-founder and CEO of SquareTrade

Steve Abernethy, co-founder and CEO of SquareTrade

To start, Abernethy knows why people are suspicious about extended-warranty offers. He acknowledges that it’s been “a business done poorly, with a fundamentally flawed business model.”

You can file most of the historic problems with extended warranties under lack-of-transparency. To start, it’s hard to make an informed decision about buying a warranty, since they’re usually pitched at the point of sale, when customers tend to be hurried, and it’s difficult to inspect the fine print or research alternatives. It’s also hard to predict whether your new $200 microwave oven will go kaput in the next two years, and therefore, whether a $50 two-year extended warranty pencils out.

On top of that, it’s often tricky to figure out who’s actually behind a warranty offer. Companies like Apple and Dell have their own protection plans. But the warranties that many big-box stores sell under their own brand names actually come from third-party providers; the stores essentially buy the plans wholesale and mark up the price.

This outside provider is the company you’ll have to talk to if you ever need to get an item repaired or replaced. In the gadget sector, the largest warranty provider is Nashville, TN-based Asurion, which might just be the biggest company nobody has ever heard of. It works with Walmart, Verizon, AT&T, T-Mobile, and Sprint, among others. In 2010, it reported $3.8 billion in revenue.

Then there’s the claims experience. If your laptop, TV, or tablet shorts out, it’s often difficult to get definitive word about whether or when it will get fixed or replaced. That’s assuming you were even able to dig up your receipt and your warranty papers before you called in your claim. (Abernethy says other warranty providers count on a certain level of “breakage,” i.e., customers who are entitled to file claims but forget they even bought a warranty, or don’t have the documents to prove it.)

These kinds of flaws and frustrations are exactly what attracted SquareTrade to the warranty business in the first place, says Abernethy. He co-founded the company in 1999 with fellow Harvard Business School alum Ahmed Khaishgi.

Up to 2006, the company was in a completely different field: mediation and dispute resolution for buyers and sellers on eBay. When it turned out that there wasn’t much demand for that service outside the auction site, Abernethy and his team started looking for other sectors where … Next Page »

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The Author

Wade Roush is a contributing editor at Xconomy.

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  • Andy

    The answer is No, I do not need an extended warranty.
    Have you ever heard of Betteridge’s law of headlines?

    http://en.wikipedia.org/wiki/Betteridge%27s_law_of_headlines

    • http://www.xconomy.com/san-francisco Wade Roush

      Okay, point taken, Andy. But from an editorial point of view, let me ask you this: Would you be as likely to read a story with a headline that said, “SquareTrade Says You Need an Extended Warranty?” Of course not. Plus, the whole gist is that I’m investigating something that, to me, is a real open question — and it remains so even after the piece has ended. So I’m not inclined to apologize for the headline.

      • http://www.facebook.com/cdecoro Christopher DeCoro

        Hi Wade,

        Thanks for the article! As someone who puts probably-far-too-much money into camera equipment, which are prone to mechanical failure and thus in need of costly repair, the question in your headline is exactly one that I’ve been asking myself. I’ve wondered specifically about SquareTrade, given that I’ve seen them frequently on eBay, and I found it very helpful to read your article and learn something about the company. I’d generally held the same negative impression about extended-warranty plans, but based on your article, I’d consider giving SquareTrade a second thought.

      • http://www.socialbakers.com/ Michal Smetana

        “But from an editorial point of view, let me ask you this: Would you be as likely to read a story with a headline that said, “SquareTrade Says You Need an Extended Warranty?” Of course not.” Exactly! I mean, creating headlines for a blog is almost as important as writing a good article beneath it. In today’s time of Twitter and Facebook sharing, the first thing people see is the headline and if the headline is not appealing, they won’t even click the link to see the remaining article. Thumbs up for a great headline and even a better article.

  • http://www.facebook.com/EmmanuelSanders Emmanuel Leroux Sanders

    The one thing not taken into account, is first of all does the warranty cover accidental damage like if I drop it, I always thought the warranties didn’t cover that. Secondly, how much will that 700$ phone cost to buy used on ebay in 2 years time if it does break? That’s the true replacement cost.

    In the end the question is, is the cost of the event more than you can bear by self insuring, since the amounts are low (compared to say a house burning down or the liability of causing a 10 car pile up on the highway) you are probably better off putting the money you would spend on the warranties in a bank account or buy some GICs and use that money to buy a new device should you break one, not to mention that in 3 years I probably would not want the same phone if it broke, you would be free to buy the same phone, a better phone or simply one that meets your needs better.

    In the end, they are making a profit, therefore the amounts they take in warranties is more than the cost of the devices they replace, all their staff and real estate etc… otherwise they would go bankrupt (This is of course true of all insurance).

    It is great to see them bringing the premiums down to be more in line with the odds of them having to pay out, I agree that at 20% it is a HUGE ripoff, down at the 12% level, it becomes more reasonable. But once again, it is a hugely depreciating asset, my Galaxy Note that was 700$ new last year can now be had on eBay for 200-300$.

    • Rob_In_NJ

      I always thought like you did – have never purchased an extended warranty in my life. Bought my wife a 2 in 1 convertible windows 8 machine, and within a month the screen was cracked and touchscreen unresponsive. I have two young kids so no real mystery about what happened. That started to change my mind about certain more fragile electronics. I am in the market for a new touchscreen laptop now and strongly considering a squaretrade warranty. Given that kids will be using it, it seems to make sense for me, even though I can afford to replace it if needed, and I of course understand that over the long haul the insurance company must be making money. Please also consider, they may make money because the cost for them to repair an item is much less than it would cost the end consumer.

      Part of the value equation here is, how much is the hassle? I may save a few dollars if my item breaks but is it worth the hassle of getting coverage. This warranty seems pretty broad so that makes the “hassle cost” pretty low.

      Anyway, long way of saying that the answer is not a simple no – people have personal circumstances that change things. That being said, I would never consider for kitchen appliances or items that are pretty reliable now. It’s the accidential breakage that convinced me to consider it for a new laptop.

      • tenofzero

        Be very carefully, if you break it due to abuse, they will not pay to fix it. So if your little tots drop it, or play rough with it, most likely they will deny the claim.

  • http://www.facebook.com/jelly.andrews.7 Jelly Andrews

    I guess extended warranty is a good idea for some but is another expense for others. It all depends on its coverage and the type of product you purchased. If the product is prone to damage, then I guess extended warranty is a must.

    HyundaiUSA-Warranty.com

  • http://www.facebook.com/captainsavaho Angelo Maimone

    At the end of the day you need good phone insurance or warranty options. In my opinion esurranty.com beats squaretrade hands down. I’m sure squaretrade paid to post this, but in the end I say compare the two and see for yourself. Esurranty.com offers more including loss and theft and doesn’t have over 130 bbb complaints in a year as squaretrade does.

  • tornadot

    It’s less about “what” extended warranty covers (or not) and more about the hassle and nightmare of making claims on the extended warranty contract. I just had to jump through fiery hoops to get a simple preventive maintenance visit done — supposedly covered by a “gold” warranty plan on kitchen appliances. I practically have to take blood pressure pills because of this. I’d rather not have this plan and pay for maintenance if / as needed. They are not worth it!

    • purekhaos

      If you read the article, one of the main points is the ease of filing a claim. I’ve never used Squaretrade personally, but it is a bit unfair to point out an issue you had, in an article explicitly explaining that that is an issue, but ST has simplified it.

  • Johan Michal

    I think offering an extended warranty is pretty common practice. I never used mine, but it is nice knowing that if I needed it, it will be always there.

    http://amtwarranty.wordpress.com/

  • Cheryl

    Hmm square trade is worth it and I use them a lot just got my $350 back today in my paypal account from them and my warranty was under $100. The first claim was for my tv, the repairman came and fixed it, it’s always no hassles. I thought nothing would never happen to any of my electronics but I was wrong. Accidental including spills, drops etc square trade covers it all.

  • Angelo Maimone

    The best extended warranty that offers the most coverage at the lowest price with the lowest deductibles and starts the day you sign up is http://www.esurranty.com

  • Mikey Boccanfuso

    I understand the uncertainty people have when it comes to purchasing an extended warranty. It is important to understand that not all extended warranties are alike, and the value of having an extended warranty varies depending on the product purchased.

    I do believe that it is valuable to consider an extended warranty for a vehicle should be considered if you plan to drive the vehicle past the standard miles included in the manufacturer’s warranty. Repairs can get pricey without having an extended warranty, however, there are certain parts or systems that aren’t covered by an extended warranty at all. Also think about if the warranty is transferrable to a second car owner if you should sell your car in the future. There are a number of extended warranties that are transferrable to second car owners, and can actually increase your vehicle’s re-sale value.

    http://www.besthyundaideal.com/what-is-the-value-of-an-extended-warranty/

  • kn_osmo@yahoo.com

    Also, check out this link:

    http://www.droidforums.net/forum/ensquared/88689-ensquared-phone-insurance-versus-squaretrade.html

    It was written in 2010 (updated thereafter to reflect accuracy) but it would seem to answer the question made by this headline (which would be a resounding NO, it’s not worth it)

    Excerpts from specified link above:
    [

    Examples are as follows: Square Trade still offer no Lost & Stolen
    options meaning that no matter how you look at things they are going
    over the heads of more than 50% of the potential market. Accidental
    damage and extended warranty is the long and short of their offer - and
    even then it is affected by a HUGE serious shortcoming: Their claim
    limit is a set number that does not go above $599 at best (on most
    expensive Android phone) and goes as low as $299. What this means in
    basic terms is that the subscriber can only claim until the claim limit
    is used up. It reduces every time you claim by value of the replacement.
    Well aint that a thing! If you damage an upmarket Droid irreparably
    that claim will easily match $599 in one go; smaller claims may go into
    the claim limit perhaps 1.5 times - rarely twice in our view. Therefore
    to call it a two year warranty is confounding. It really is a warranty
    that covers you for the claim limit and may in effect last only for 1
    claim on one day. If it occurs in the second month then "poof" goes the
    remaining 22.

    So why do SquareTrade claim it is a two year warranty? Because
    technically by adding on the extended warranty part, which only kicks in
    after year 1 it does extend into year 2 even if the accidental part of
    the deal is gone. But what good is Year 2 with extended warranty if in
    fact the accidental damage protection expired early in Year 1? It leaves
    you the Droid subscriber naked for drops, spills, lost and stolen
    protection all for the so called extended warranty cover: Essentially
    cover for factory default after manufacturer's warranty drops off.

    Really SquareTrade offers a disjointed program with small pieces of
    different items; leaving out others; and unlikely to have the timing
    right at all. Net result if you understand this: Impractical cover on
    accidental damage that is excessively limiting; no Lost & Stolen
    whatsoever. The only full item is extended warranty that is a second
    year thing anyway.]

  • Johan Michal

    Before making decisions to purchase an extended warranty one need to be very sure that the product really needs an extended warranty. It depends upon the type of product that you have purchased. Thanks for sharing this post.

    AMT Warranty

  • Beth Toraason

    One week and one day after the warranty on my POS Samsung microwave expired, the touch pad went out. I paid over half the purchase price to get it replaced. Now, six months later the magnatron has gone out. My first microwave worked for twenty-three years, my second less than two. I found this article while searching for an extended warranty for my third one. My answer is “Yes”.

  • jb

    A rip off. Bought a camera on ebay I wouldn’t have bought, but the warranty made it attractive. Three months later and the camera quits, their only solution is to agree to a different contract, well less then what I purchased. And they are totally ignoring me, unless I agree to this new lesser contract.

  • Jason

    That plan is not perfect at all….Look what happened in this case:

    Dear all,

    I am new here and I hope you don’t mind I try to seek advise here.

    In May 2013 I bought a Canon G15 at B&H with a Square Trade Protection Plan with Accident Coverage.

    A year later I had an accident here in France with my Camera. I informed Square Trade and they sent me in an email that I should go to visit a local shop. So I did. I went to a local camera shop and they sent it basically to Canon France. Canon wants now to replace the whole camera block because I was told it is a block. Costs are estimated around 520 $, the insurance covers only the purchasing price which was 450$.

    Before I sent the camera away, I pointed out to them that repair costs in Europe are high and it would be cheaper to organise a new camera for me and ship it to me. That was refused.

    I have also pointed out to them that I am in France!

    I also received an email, pointing out, that I should contact them in case these costs are higher then 450$. So I did, but now they suddenly demand I should ship my camera which is at Canon France back to US. Why do I have to pay twice for shipping now because in first place they suggested local dealers here in France!

    Also, they want to complete my warranty but I paid for 3 years coverage.

    It is big joke and I don’t know what I should do. I offered them solutions, but nothing was good enough for them. I have no camera, no money, just a lot of trouble with this company.
    Of course, they refuse to pay me currently anything and I have no camera.

    Was somebody in a similar situation and could offer advice?

    Thank you sincerely for your help.

  • Hit Shop

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  • SP

    A lot of people who buy extended warranties also need to see the quality of the underwriter of the warranty and the terms then get the warranty that provides the best value for money. I got my warranty with http://www.warrantizor.com. They have a A rated underwriter like squaretrade but are much cheaper.

  • Sally

    BestBuy extended warranties are definitely worth it. I had to replace my computer twice in the first year of owning it and it was nearly completely free for me. My first notebook from them cost $1,000, and they give you the full cost towards a new computer from them. No hassle either, when I went in and explained my issues to the GeekSquad guys they verified what I said and I got my refund. The first time they sent it away for screen repairs but within a week I got an email that they weren’t going to repair it, rather just refund the cost. The second time I brought it in and it was just completely dead so they gave me the replacement cost to get a new one immediately. So not only had I gotten a 20x return on the one year warrant I purchased for something like $150 but it was easy too. The only money I had spent was to renew the warranty another year.

  • rabid goon