Extended warranty advice

[AndySpill]

Just a couple of points reading through the 6 pages of the argument. Some have been made here, but the use of averages is simply meaningless for an individual asking about their set of circumstances.

Should individual vehicle usage circumstances factor into the calculus of warranty worth...?: absolutely.

Are averages, which compare competing policies as well as compare policy premiums to the present value of expected repairs meaningless as claimed....?: absolutely not. The cost, timing and likelihood of expense (and revenue) forms the building blocks on which informed decisions are made in many aspects of life.

In addition, the assumptions used by any of the automotive guides around costs/year for breakdowns, are again, averages gained across tens (or hundreds) of thousands of similar vehicles makes. For an individual, the distribution of repairs is not "normal" and tends to follow a much more random pattern with periods of zero expenses mixed with higher than average expenses.

Which is precisely why the only way to objective gauge a warranty's worth has to be to compare its cost to the present value of expected repair costs: the latter factoring in the likelihood of a repair, what it will cost, and how far into the future it will on average occur.

Of course YMMV applies at the individual level. It's these averages though upon which informed decisions are made in time zero. Of course some will find the warranty more than worth it after the fact. There are even some who statistically will find the warranty more than worth it at time zero, based on anticipated heavy vehicle usage. But most do not. There is no new math here.

No make and model of extended warranty coverage is underwritten with anything less than profit intended, as much as some policies need revision when the history of payments to policy holders doesn't meet underwriter objectives. Nobody underwrites a policy on a particular make and model with intent to lose money or say to themselves, "we'll just bucket these premiums into a larger pool of monies that insures more profitable make and model warranty lines."

If a warranty is your cup of tea: get one. Your individual vehicle use case and aversion to risk is yours alone. But if these policies on average made their holders money....wait for it....

underwriters would be investing premiums into the purchase of owner policies themselves. They don't. Instead these pools are invested in equities, debt instruments and closer to cash equivalents (e.g. T Bills) to reflect the projected outlay of monies to policy holders over time.

The other note is that the REALLY expensive cost to replace electronic parts changes the math on warranties, especially since the failure mode for electronic components doesn't follow the same pattern of mechanical failures/mileage based wear and tear. Excessive heat/cold/starts/power surges/etc. can all cause 000's of dollars of repairs on parts that can't be repaired.

...."on parts that can't be repaired." Yes--in fairness, the failure of electronic parts follows less of a wear and tear and failure with time based paradigm. It is more random and harder to predict for the individual owner. It is not nearly as cut and dry as "time to change the timing belt at x miles" wear and tear paradigm.

That said, these electronic component failure events, upon which profit based insurance is based, are far less random at the aggregate. And in profit based insurance, policy holders statistically lose money. It's no different for medical insurance (being a statistically unprofitable expense) except that things that cover potential catastrophic financial lose (like medical insurance) should be purchased and I highly advocate people to have.

The last time I had a vehicle "repaired"..I can't remember. Vehicle service of electronic and non-electronic components alike is far better described as "yank and replace" than 'wrench until fixed."

A complete side note to the comments that people with lower incomes tend to gravitate towards warranties, that's simply not the case. Most warranties are sold with new cars, lower income people tend to purchase used. If you look at people driving w/o basic insurance, it's typically people who struggle to make ends meet. In addition, the "market" on average returns 7% per year, not 10%, so any investment in a repair fund grows a lot slower than noted in some of the posts.

I can't speak for others. What I can say is that I think warranty coverage isn't necessary geared towards or purchased by those with less discretionary spending but that those who buy policies because they lack financial wiggle room to absorb out of pocket repair cost statistically don't come out ahead than those with the financial wiggle room to self fund such expenses.

Here's what I do contend. On the whole, if such extended warranty repair coverage wasn't available and more people were forced to fund this expense by buying cheaper vehicles they better can truly afford (factoring in repair costs) they'd end up keeping, on the whole, far more money in their wallets than currently forwarded to warranty providers.

How do I know this? By the sheer fact that warranty coverage is a profitable business that even if it was able to reduce what dealers are willing to accept in repair costs--given large purchase power--over what the individual pays out of pocket, that warranty providers would by no means be incentivized to share those savings, if any, with their policy holders (at loss of profit to themselves) beyond that necessary to remain competitive with other competing warranty offering companies.

As for the market, in grows at 10% on average but inflation--something that also effects the cost of repairs, and therefore isn't being factored in here--not because it's not relevant, but to compare "apples to apples," adjusts down this return to the 7% figure you cite.

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[runningshoes]

.....
As for the market, in grows at 10% on average but inflation--something that also effects the cost of repairs, and therefore isn't being factored in here--not because it's not relevant, but to compare "apples to apples," adjusts down this return to the 7% figure you cite.

Correct and I should have mentioned that - the point I was (poorly) making is that any inflation will also impact your future cost of repairs so the net benefit gained is the 7% and not 10%.

 

[AndySpill]

Correct and I should have mentioned that - the point I was (poorly) making is that any inflation will also impact your future cost of repairs so the net benefit gained is the 7% and not 10%.

Inflation raises the out of pocket cost of repairs at pretty much the same rate it diminishes stock market returns.

To factor inflation into stock market returns is fair as long as one also factors them into the reduced spending power of one's dollar on repair costs.

To not factor inflation into the reduced spending power of one's dollar on repairs in this case is also fair as long as you consider (or should I say not consider) inflationary influences on reduced returns from the stock market and consider the stock market to appreciate at, on average, 10% annual--at least historically.

Apples to apples comparison is necessary. I did not consider inflation's influence on repair cost so I didn't consider it on reduced stock market returns.

 

[toddinrochester]

Jeepcares is a joke and so is the warranty on this supposed "Trail Rated" vehicle. No matter if its an extended warranty or not, Jeep is in severe financial trouble right now if we are all acting like its not. Serious trouble. They are going to deny warranty claims as much as they can as they are underwater.

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