Do You Need an Extended Warranty?

As a ginormous sports fan and general homebody, I was overjoyed when I began putting aside money in my monthly spending plan for my first big screen TV. After researching models and features, I had the perfect set picked out. I waited patiently for the right sale and even paid for the pricey extended warranty, as I was determined nothing would come between me and my trusty sports companion.

Fast forward nearly 13 years and my beloved TV is still with me, flawlessly televising event after event without skipping a beat, no repairs necessary. So, while I have zero regrets on my purchase, I do wish I had that money back I spent on the extended warranty.

What Are Extended Product Warranties?

Most major purchases — such as cars, electronics and major household appliances — come with manufacturer's warranties, meaning if a product doesn't work as expected or becomes damaged, the buyer can return it or get a replacement or repair, depending on the terms.

While some purchases come with limited warranties, others require an additional cost. These extended warranties — which are often structured like service contracts — differ from manufacturer's warranties in that they're a form of insurance designed to cover specified repair or replacement costs.

Before purchasing any extended warranty, it's important to consider a few things:

• See what's covered: Know the limitations. Be careful if you're deployed OCONUS, since warranties may be restricted to the country or continent of purchase. And if it's not listed in the warranty, assume it's not covered.
• Look for hidden costs: Check for hidden fees, such as deductibles or a cost you pay with each claim. These add to repair costs.
• Check the duration: Know how long the coverage lasts. This will help you calculate yearly or monthly contract costs.
• Know how to file claims: See who will take care of repairs and how you make a claim. If you're on active duty, see if you'll have to return it to the seller for repairs.
• Research company reputation: Review the company's reputation and years in business. This is especially true when buying online. Search reviews and check your state consumer protection office for complaints.

Finally, remember that extended warranties might not be worth it if your purchase most likely won't need repairs or if repairs won't be expensive!

Examining "Self-Insurance"

When evaluating whether an extended warranty is best for you, understand that — in many cases — your purchase may already be covered by a mix of manufacturer warranties (as noted above), credit card issuers (some automatically extend warranties on purchases) and insurance. And a recent study found that consumers overpay for extended warranties because they think that the product will need a repair.

Rather than purchasing extended warranties, you might instead consider setting aside money each month to cover repairs, replacement or maintenance in your monthly spending plan. That way, you're paying for only the repairs you need — if and when you need them — rather than paying for coverage that may go unused or underutilized.

Developing a robust emergency fund can help ease the burden of unexpected car repairs or home maintenance costs. This method of "self-insurance" may allow you to maintain higher deductibles and lower premiums on your home or auto insurance policies, as well as avoid buying insurance or extended warranties on smaller purchases altogether. Traditional insurance can provide coverage for potential catastrophic events, while an emergency fund can handle smaller expenses.

The Last Word

To put it another way: Imagine all the monies you've paid throughout the years for extended warranties as your self-insurance pool. Looking back, did you put in numerous — or any — claims against your extended warranty policies? Or would that money have been better spent on other things? Even if one TV needs replacing from, say, a missed penalty call, the money in your self-insurance fund would (most likely) cover the costs to replace it.

Make sure you fully understand the nuances of any extended product warranty before purchasing one. Have questions? Make an appointment with your nearest personal financial manager or counselor. You can also report suspected fraud to the Federal Trade Commission or your state attorney general's office.

As you reach new milestones and complete your service's financial readiness training, look to the Office of Financial Readiness and your service for additional resources. You can also follow @DoDFINRED on Facebook, Twitter, Instagram and YouTube — and download our mobile app, Sen$e, for financial tips on the go! Find it in the Google Play and iOS app stores.