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Warranties - Expensive Insurance Against Debt?

There's truly nothing wrong with insurance. It is there for us when we need it most, and is a cheap way to hedge the risks against natural disasters and other things we may not have prepared for, but always happen. Certainly, not having insurance for your home, car or health is dangerous! When something catastrophic happens, no insurance is brutal to your finances, and can create a massive debt you may not be able to deal with. But, there is one insurance that requires a little more research before you purchase it. That insurance - a warranty.

Product warranties are an age-old sales concept, some of which have superior value, and others which may not be worth the paper they are printed on. Manufacturers and retailers have jumped on the warranty bandwagon, actively selling them (sometimes more than the product itself) in order to gain profit. The pitch is this: if your television or stereo breaks, buying an extended warranty now will save you all of the money it costs to fix it when it does break. The concept here is that the price you're paying now is relatively low, and ensures that your product will work well into the future. Sounds good? In some cases it is. In some cases, a warranty is a pointless waste of money.

Should You Pay For A Warranty?

First, when considering a warranty, you should definitely consider your risk tolerance. We approached risk tolerance and investing here, and the concept is very similar for products. The fact is, the odds are against products failing, and thus, for most people, having an extended warranty is pointless. If warranties were always effective, no company in their right mind would dare sell one. But, for those people who fear the "surprise repair bill", it can be a good thing. If you sleep better at night knowing your product is protected, then the benefit may be worth the cost.

How Much?

A key determiner in whether you should purchase a warranty or not should always be the price you are paying for the product itself. For many products, such as cell phones or lower-end digital cameras, it is just simply not worth it to purchase a warranty. After all, if the cost of the warranty is 25% or more of the product itself, you are paying way too much. But, if you are buying, say, a large screen Television and you know that repairing it could put you in debt, you may want to consider it.

The Manufacturer May Already Protect You

A question you should ask yourself when buying a product is: what kind of manufacturer's warranty is included? In many cases, manufacturers may cover you for up to five years on some consumer products, which effectively destroys the point of purchasing any add-on warranties. Also, extended warranties for cars may not have much point either, as the current US auto sales picture is very competitive, meaning you can always use warranty as a bargaining chip when shopping for a car. So keep aware of this and save money well into the future.

Of course, purchasing a warranty for a product isn't something that can be generalized: this is a decision you must make on a case-by-case basis. Remember this, however, manufacturing processes continue to improve, meaning products will continue to be of better quality as time goes on. So in this way, warranties become more and more profitable for companies because they simply know that it is very unlikely their products will fail. Once you know this fact, you can adjust your need for this (very expensive) product insurance immediately, and begin to distinguish between which warranty you need, and which warranty is worthless.

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