Christine Sirette: The likelihood that the product will fail during the extended warranty period is quite low. People overestimate the failure rate. So you end up paying these premiums for protection that in all likelihood you will not end up using. I'm Christine Sirette and you're listening to the Wirecutter Show. Hey there, it's Christine. If you've ever bought a computer, a cell phone, an appliance, or any other purchase of relative value, you've probably been offered an extended warranty. Maybe a salesperson asked you if you wanted to purchase AppleCare after you bought a phone. Or maybe you were offered an extended warranty at checkout on a website when you were making an online purchase. And at that moment, you might have wondered, will paying a little extra now for an extended warranty, say 50 or 100 bucks or maybe a monthly fee of something like $16. Will that save me a big repair bill if this thing breaks? Will it provide me with some kind of insurance against a future hassle? In today's episode, I'm exploring this topic with Liam McCabe, a longtime Wirecutter reporter. Liam has been reviewing and writing about large appliances, HVAC systems, and home improvement solutions for over a decade. Basically, he covers big stuff that costs a lot of money. He just published an article that makes a strong argument for why you should almost never buy an extended warranty, at least not for most of the things you have in your home. We're going to get into the math, the psychology, and the big business of extended warranties after the break. Be right back.

Christine Sirette: Welcome back. Today I'm speaking with one of my longtime colleagues, senior writer Liam McCabe about extended warranties and why you should almost never buy one. Liam, welcome to the show.

Liam McCabe: Thanks for having me.

Christine Sirette: I am thrilled to actually have you in the studio this time. We've talked to you before, but it's really nice to see you in person. Okay, you've been reporting about and reviewing appliances, HVAC systems, and other kind of large expensive things that people buy for their homes for a long time. You did a stint at Consumer Reports and at Reviewed. So, you've probably thought a lot about when it's worth getting an extended warranty on any number of purchases. So, going into this investigation, what was your take on extended warranties?

Liam McCabe: I went into this I had a period a few years ago of listening to a lot of personal finance experts just to kind of get my house in order. And they cover a lot of topics, but one that came up in a bunch of places was extended warranties and why it's generally not a good use of your money in pretty much any scenario. And I didn't look into it much deeper than that at the time, but I kind of had it in the back of my mind that this might be something worth writing about at some point.

Christine Sirette: What is the difference between a manufacturer warranty and an extended warranty?

Liam McCabe: Right. So, a manufacturer's warranty automatically comes with the product when you purchase it. It's written down somewhere in a pamphlet or on the box or maybe on the product listing online. And that is basically the manufacturer. It's their promise against defects usually for a certain period of time. Most commonly, it's about a year for like major appliances or expensive electronics. It can be 90 days, it can be 5 years lifetime. And there, you know, you have to look at the specifics, but it's automatically included with the purchase. Often is like a sweetener to convince you to buy that product instead of something similar.

Christine Sirette: So, if I buy a washer and dryer combo at Home Depot, it's usually coming with some kind of manufacturer warranty. If I'm buying a computer at Apple, it's coming with some kind of manufacturer warranty. There's some guarantee that this thing, if it breaks within this amount of time, they'll take care of me, right? Extended warranty where you know you're going to have 3 to 5 years extended warranty covering certain things extended warranties that people might be offered. AppleCare I think is one that people will be familiar with so when you buy a phone or iPad or Mac whatever it is they will offer AppleCare Plus or AppleCare 1 it's additional coverage on top of the manufacturers warranty. So, believe the iPhone has a one-year warranty on it, for example, and that will protect against defects or manufacturing errors. AppleCare Plus often protects against accidental damage or sometimes loss or theft. And you know, the way that they've restructured that one, you now pay a monthly premium instead of a lump sum. So basically, as long as you keep paying that monthly premium, you will have that extra protection on that product. You know, if you are bought into the Apple ecosystem, you surely have been offered AppleCare. But what are some other examples like common examples that people might run into?

Liam McCabe: Yeah, Best Buy, Geek Squad is kind of a longtime popular one. They now have a store membership program that offers similar benefits. You know, even checking out on smaller e-commerce websites, you'll usually see some kind of protection plan offered. There's smaller companies like Mulberry is a is a newer one. Extend. And on Amazon, for example, you'll see Asurion, which is actually one of the bigger companies. They have like a a big bundle. You just, you know, you pay $16.99 a month for Asurion Complete Protect, I believe it's called, and that will cover everything that you buy on Amazon that's eligible. There was someone I talked to for the story who had purchased that and his headphones broke right outside the manufacturer's warranty period and the Asurion plan covered him and he filed a claim with them and got the process started. Got a little more complicated than that.

Liam McCabe: So the amount of money that you spend to get that protection is usually more than the protection that you'll get back. You know, I'm not going to do math out loud in public, but researchers have studied this. Personal finance experts have looked into it. The likelihood that the product will fail during the extended warranty period is quite low. People overestimate the failure rate. So you end up paying these premiums for protection that in all likelihood you will not end up using. And even if you do use it, there are sometimes cases where you could have done the repair yourself for cheaper or hired a repair technician yourself for less than you ended up paying the coverage.

Christine Sirette: Why is this different than other types of insurance?

Liam McCabe: Insurance is a very important tool to protect yourself against financial catastrophe. So something really expensive like cancer treatment or a house fire or even a car wreck, the cost of that if you don't have insurance is very difficult to absorb. You know, it's in the tens of thousands if not hundreds of thousands or more dollars. That's very difficult for anyone to come up with that money without insurance. When a thousand dollar dishwasher breaks, that's very disappointing and it feels unfair and you are going to feel bad about that, but you can absorb it to some extent. And there are ways to replace that $1,000 dishwasher or repair it for we're talking like in the hundreds of dollars, which I don't want to make that seem like no big deal, but in the grand scheme of things when we're talking about $300 repair or a $500 replacement dishwasher versus being on the hook for $50,000 in damages for a flooded basement, for example. It's a completely different scale.

Christine Sirette: Reading your piece, I was really surprised by some of the statistics about how little some of these protection plans pay out to their policy holders when you compare it to something like homeowners insurance or health insurance. Can you walk us through the math?

Liam McCabe: When you look at the public financial statements for health insurance companies, for example, 90% of what they take in in premiums typically gets paid back out to cover medical costs. So, they keep 10% to cover the cost of doing business. With home and auto, it's usually something more like 65 or 70% gets paid back out to policy holders. With extended warranties, you know, not all of them are publicly traded, but the ones that we did find some of the bigger ones, the payout rate is about 25%. A little bit less than that. Yeah. So, they're keeping 75% of the money that gets paid in and not using that to cover repairs or replacements.

Christine Sirette: But if the math is so bad for extended warranties, why do so many people still buy them?

Liam McCabe: I think it hints at something in human nature. Like we just want some assurances when you spend money. You want it to feel fair. There are some theories among researchers about exactly what drives the impulse to buy an extended warranty, to spend extra on this protection. The leading one, and probably the most obvious, is just risk aversion, loss aversion. The fear of the pain you will feel if this thing breaks sooner than you want it to hurts more than the pain of spending extra to protect it. Right. That makes sense. Some other interesting papers have looked at alternatives. There's one paper that came out last year called the illusion of victory. That one suggests that there is sort of a gambling impulse like people buy them because they think they're going to win. It's not so much that people are afraid of losing. It's just there's some people who think they know a good deal when they see one and they're sure they're going to win. There was a study from 2009. I think the Times actually covered this when it came out, suggesting that people are more susceptible to offers to buy extended warranties after they've decided to buy the product. In that nice buzzy moment when you've decided to treat yourself to a $1,200 TV or whatever it is, and it usually has to be like a fun purchase, people seem to be more susceptible to saying yes to one of these extended warranty offers more so than something utilitarian like a washing machine.

Christine Sirette: What are you supposed to do instead of get a warranty? Instead of buying an extended warranty, what should you be doing instead?

Liam McCabe: The nuts and bolts econ geek way of looking at it is, you know, you should self-insure. Instead of spending the money on an extended warranty, which is a type of insurance, you should just hang on to that money, put it into a savings account or under a mattress, whatever you want to do, and when things need to be repaired or replaced, you just take money out of that savings and pay cash. And the stats suggest that if you do that, you're going to come out ahead in the long run.